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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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
(State or other jurisdiction of incorporation or organization)
1655 26 th Street
Santa Monica, CA
(Address of principal executive offices)
20-4731239
(I.R.S. Employer Identification Number)
90404
(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
Common Stock, $0.0001 par value
Name of each exchange on which registered
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ☒ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Non-accelerated filer ☐
(Do not check if a
smaller reporting company)
Large accelerated filer ☐
Accelerated filer ☒
Smaller reporting company ☐
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 June 30, 2016, the aggregate market value of the registrant’s common stock, $0.0001 par value, held by non-affiliates of the registrant was
approximately $63.0 million (based upon the closing sale price of the common stock on that date on the New York Stock Exchange).
As of February 15, 2017, there were 19,865,638 shares of the common stock, $0.0001 par value, outstanding.
Documents Incorporated by Reference
Part III of this Annual Report on Form 10-K incorporates by reference portions of the registrant’s Proxy Statement for its 2017 Annual Meeting
of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report
relates.
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LEAF GROUP LTD.
INDEX TO FORM 10-K
PART I. Item 1 Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Mine Safety Disclosures
PART II. Item 5 Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6 Selected Financial Data
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
PART III. Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accounting Fees and Services
PART IV. Item 15 Exhibits, Financial Statement Schedules
Item 16 Form 10-K Summary
SIGNATURES 2
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PART I
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K 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. Private Securities Litigation
Reform Act of 1995. All statements other than statements of historical facts contained in this Annual Report on Form 10-K,
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 described
in Item 1A. under the heading entitled “Risk Factors.” 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 Annual Report on Form 10-K 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 Annual Report on
Form 10-K, except as required by law.
You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form 10K and have filed with the Securities and Exchange Commission (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.
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Item 1. Business
As
used
herein,
“Leaf
Group,”
the
“Company,”
“our,”
“we,”
“us”
and
similar
terms
include
Leaf
Group
Ltd.
and
its
subsidiaries,
unless
the
context
indicates
otherwise.
“Leaf
Group”
and
other
trademarks
of
ours
appearing
in
this
report,
such
as
“eHow”
and
“Society6”,
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.
Overview
Leaf Group is a diversified Internet company that builds platforms across our marketplace and media properties to enable
communities of creators to reach passionate audiences in large and growing lifestyle categories . In addition, our diverse
advertising offerings help brands and publishers find innovative ways to engage with their customers . Our business is comprised of two service offerings: Marketplaces and Media.
·
Marketplaces
: Through our Marketplaces service offering, we operate leading art and design marketplaces where
large communities of artists can market and sell their original artwork or their original designs printed on a wide
variety of products. Society6.com (“Society6”) provides artists with an online commerce platform to feature and
sell their original designs on an array of consumer products in the home décor, accessories, and apparel categories.
SaatchiArt.com (“Saatchi Art”) is an online art gallery featuring a wide selection of original paintings, drawings,
sculptures and photography that provides a global community of artists with a curated environment in which to
exhibit and sell their work directly to consumers around the world. Our Marketplaces service offering also includes
The Other Art Fair, a leading London-based art fair for discovering emerging artists that complements our Saatchi
Art online marketplace . ·
Media
: Our Media service offering includes our leading owned and operated media properties that publish
content, including videos, articles and designed visual formats, on various category-specific properties with distinct
editorial voices. Our media properties include Livestrong.com, a health and healthy living destination; eHow, a doit-yourself reference destination; and over 40 other media properties focused on specific categories or interests that
we either own and operate or host and operate for our partners. Our Marketplaces service offering primarily generates revenue from the sale of products and services through our art and
design marketplac es. Our Media service offering generates the majority of its revenue from the sale of advertising on our media
properties. We also 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 . Information about our revenue by service offering is set forth in
Note 17 of our Notes to Consolidated Financial Statements included in Part IV, Item 15, “Exhibits, Financial Statement
Schedules” of this Annual Report on Form 10-K.
Separation
On August 1, 2014, we completed the separation of Rightside Group, Ltd. (“Rightside”) from the Company, resulting in
two independent, publicly traded companies (hereinafter referred to as the “Separation”). Following the Separation, Rightside
operates our former domain name services business, while we continue to own and operate our Marketplaces and Media
businesses. The Separation was structured as a pro rata tax-free dividend involving the distribution of all outstanding shares of
Rightside common stock to holders of our common stock as of the August 1, 2014 record date (the “Distribution”). Immediately
following the Distribution, we completed a 1-for-5 reverse stock split of our outstanding and treasury shares of common stock.
The financial results of Rightside are presented as discontinued operations in our consolidated statements of operations for all
periods prior to fiscal year 2015 presented in this Annual Report on Form 10-K.
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Sale
of
Cracked
Business
In April 2016, we completed the sale of substantially all of the assets relating to our Cracked business, including the
Cracked.com humor website, to Scripps Media, Inc., a subsidiary of The E.W. Scripps Company, for a cash purchase price of
$39.0 million. Additional financial information relating to the Cracked business for the relevant periods is set forth below under
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual
Report on Form 10-K.
Content
Studio
Realignment
In June 2016, we took certain actions to streamline our content publishing studio business (formerly known as studioD) and
better integrate the business into our broader Media service offering. As part of this realignment, we reduced the staffing within
this business by 35 full-time employees and integrated the remaining employees into our other Media businesses. Following this
realignment, we are continuing to create content for third party publishers and brands using a more integrated approach. Rebrand
to
Leaf
Group
Ltd.
Leaf Group Ltd. was incorporated in Delaware in March 2006 as Demand Media, Inc. As part of our evolution from a pure
digital media company to a diversified marketplaces and media company, our corporate name changed from Demand Media, Inc.
to Leaf Group Ltd. effective November 9, 2016. We also commenced trading under the ticker symbol “LFGR” on the New York
Stock Exchange (the “NYSE”) as of market open on November 9, 2016. Our headquarters are located in Santa Monica, California.
Marketplaces
Our Marketplaces service offering includes Society6, which we acquired in June 2013; Saatchi Art, which we acquired in
August 2014; and The Other Art Fair, which we acquired in July 2016. Our marketplace platforms provide consumers with tools to
discover a large selection of original artwork and designs created by a leading global artist community of approximately 300,000
artists across all platforms. Our marketplaces empower artists to reach a global audience of art lovers and design conscious buyers
and earn a living pursuing their passion, while we handle various marketing, promotion, and logistics, such as coordination of
print-on-demand production, global shipping, and payment processing. In 2016, we expanded our art marketplaces with the
acquisition of The Other Art Fair, allowing us to offer buyers the ability to purchase original art from emerging artists around the
globe, both online through Saatchi Art’s online gallery and in-person through The Other Art Fair’s events. We believe our
marketplaces are distinguished by the high-quality products, caliber of artists and superior customer service that we provide to
both artists and buyers.
Our art and design marketplaces include:
· Society6
. Society6 provides artists with an online commerce platform to feature and sell their original designs on
an array of consumer products in the home décor, accessories, and apparel categories . Artists post their designs,
set the price for art prints, and select other products within the Society6 product portfolio on which their designs
can be sold. After a product is purchased, third party vendors produce, package and ship the product directly to the
buyer. As of December 31, 2016, there were approximately 230,000 active artists on Society6, an increase of more
than 32% from the prior year. There are now more than 3.6 million unique designs available across the Society6
product portfolio, a 33% increase year-over-year. During 2016, Society6 facilitated sales from customers located in
over 100 countries, and approximately 44% of Society6’s users accessed its services via mobile devices. ·
Saatchi
Art.
Saatchi Art is an online art gallery featuring a wide selection of original paintings, drawings,
sculptures and photography that provides a global community of artists with a curated environment in which to
exhibit and sell their work directly to consumers around the world . Saatchi Art’s art advisory service provides
individual collectors and trade professionals with complimentary access to an art curator who will select artwork
for the customer to browse that are tailored to the customer's needs,
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space and style. There are currently more than 650,000 original, unique works, which were created by over 75,000
artists, available on the Saatchi Art platform. In addition, artists can choose to sell prints of the artwork they post
on Saatchi Art and we contract with third-party vendors to produce and ship the prints directly to the buyer.
Saatchi Art has sold works to buyers located in over 80 countries. ·
The
Other
Art
Fair
. The Other Art Fair, a leading art fair for discovering emerging artists, provides a platform for
artists to present and sell their work directly to art buyers in an accessible atmosphere designed to allow visitors to
enjoy an interactive and immersive experience. Using a selection committee of art experts and a guest curator, each
fair showcases approximately 120 artists and their work, enabling both collectors and first-time buyers to buy
directly from emerging artists. Since 2011, The Other Art Fair has hosted approximately 15 fairs working with
over 1,000 artists from more than 20 countries. The Other Art Fair currently hosts fairs in the United Kingdom and
Australia, and intends to expand these fairs to the United States in 2017. Media
We operate diverse media brands that reach audiences through social channels, newsletters and websites. We create a wide
variety of content designed to engage our audience on a range of topics across these channels. In some cases, these efforts support
the brands of our partners rather than properties we own. Content
Creation
and
Distribution
. We create high-quality, informative and engaging digital content in a wide variety of
formats including videos, articles and slideshows. We strive to create content that appeals to our audiences and to our advertisers.
We publish a majority of our content on our owned and operated media properties, each of which is focused on a specific topic or
interest. Most of the content published on our media properties was previously produced by a large community of freelance
professionals, but we now focus our content creation process on building relationships with a smaller number of freelance content
creators and influencers who have subject matter expertise and bring increased authority and credibility to their content.
Users visit our media properties through search engine referrals, direct navigation, social media referrals, and e-mail and
online marketing activities. Our media properties are designed to be easily discoverable by users due to the combination of
relevant content, search engine optimization and the ability of users to recommend and share our content via social media websites
and applications such as Facebook, Pinterest, Instagram and Twitter. Visitors access our media properties through desktop and
mobile platforms, including mobile applications, and can also view our content on third party distribution channels such as
Facebook and YouTube.
Our portfolio of owned and operated media properties includes our largest brands —
Livestrong.com and eHow —
as well
as nearly 20 smaller media properties that are focused on specific topics or interests. Livestrong.com is an online destination for
health and healthy living with an extensive library of health, fitness, lifestyle and nutrition articles and videos. This content,
combined with interactive tools, mobile applications, user-contributed nutritional information and social media community
features, helps users create customized goals and monitor their health, fitness and life achievements, while serving as a platform
for community members to connect with each other. eHow is a do-it-yourself reference destination with an extensive library of
articles and videos that provide people with practical solutions and easily understandable instruction and advice to solve a variety
of problems that they may encounter throughout their day. During the third quarter of 2016, we began launching several categoryspecific properties leveraging topics and content from eHow because we feel that more narrowly focused media properties with a
distinct editorial voice now resonate better with audiences. These category-specific media properties currently
include: Cuteness.com, a community for pet owners and animal lovers; Techwalla.com, a site that provides expansive reviews and
information on technology products for your home and family; LEAF.tv, a site with rich content in living, eating, and fashion; and
Sapling.com, a millennial source for information on personal finance. As we continue this process of migrating categories of
content onto new media properties, eHow.com will narrow its focus on informative and entertaining projects for do-it-yourself
enthusiasts. Collectively, our owned and operated media properties reached nearly 46 million unique visitors in the United States
in December 2016 according to comScore.
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We also use our content creation platform to create original custom content focused on specific topics for third party
publishers and brands, which we host and seamlessly integrate onto dedicated sections of these partners’ websites. These
arrangements generally include a revenue sharing component with regard to advertising revenue generated by this content. We
currently have approximately 25 such hosted properties in our portfolio.
Monetization
. We have developed a multi-faceted monetization platform, incorporating a multitude of advertising partners
ranging from sell side platforms to advertising exchanges, that we deploy to our owned and operated media properties and the
media properties we host for our partners. We work directly with advertisers to provide them with sponsored content and premium
display and native ad inventory, while also streamlining ad planning and buying and managing media campaigns through the use
of technology and proprietary first-party data sets .
For monetization of our display ad inventory, our programmatic platform automates the selling of ad inventory using third
party technology and sophisticated data sets . We use a series of algorithms and proprietary methods to present visitors with
relevant advertisements that can be dynamically optimized via creative rotation, frequency capping, and data to improve
monetization performance and consumer experience. Our system of monetization tools also includes yield optimization systems
that continuously evaluate the performance of advertisements on desktop and mobile in order to maximize revenue, while utilizing
ad management infrastructures that manage multiple ad formats and control ad inventory.
Technology
Our technologies include software applications built to run on independent clusters of standard and commercially available
servers located at co-location facilities in North America. We make substantial use of off-the-shelf available open-source
technologies such as Linux, PHP, MySQL, Redis, mongoDB, Memcache, and Lucene in addition to commercial platforms such as
Microsoft, including Windows Operating Systems, SQL Server, and .NET. These systems are connected to the Internet via load
balancers, firewalls, and routers installed in multiple redundant pairs. We also utilize third party services to geographically deliver
data using major content delivery network (“CDN”) providers. Virtualization is heavily deployed throughout our technology
architecture, which affords scaling numerous properties in an efficient and cost effective manner. Enterprise class storage systems
provide redundancy in order to maintain continued and seamless system availability in the event of most component failures.
Our business intelligence platform and financial systems are hosted in Tier IV data centers alongside most of our public
facing Media websites and applications . Some of our websites are hosted with a third party cloud hosting provider. Each of our
significant websites is designed to be fault-tolerant, with collections of application servers, typically configured in a load balanced
state, in order to provide additional resiliency. Our environment is equipped with a full-scale monitoring solution, which includes
an outsourced network operations center that is continuously staffed.
International Operations
We provide our products and services to consumers around the world. Our marketplaces are available to artists and buyers
globally and, in 2016, Society6 started working with its first international vendor in Australia to more efficiently ship products to
customers in the Asia-Pacific region. In addition, The Other Art Fair is based in London and currently hosts art fairs in the United
Kingdom and Australia. Our Media service offering includes eHow en Español and eHow Brasil (Spanish and Portuguese
language sites that target both the U.S. and the worldwide Spanish/Portuguese-speaking markets). Information regarding financial
data by geographic areas is set forth in Note 17 of our Notes to Consolidated Financial Statements included in Part IV, Item 15,
“Exhibits, Financial Statement Schedules” of this Annual Report on Form 10-K, and additional information regarding certain risks
associated with our international operations is provided under the heading “Risk Factors” in Part I, Item 1A of this Annual Report
on Form 10-K.
Customers
The products and artwork sold through our Marketplaces service offering are primarily sold directly to consumers. We also
sell some products and artwork to trade professionals and commercial customers.
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Our Media customers currently include advertisers and advertising providers that purchase advertising space on our owned
and operated media properties, as well as third party brands, publishers and advertisers for whom we create and, in some cases,
host content. O ur advertising strategy is currently focused on both direct sales channels with brands and advertising agencies,
particularly with respect to native and sponsored ad campaigns, and programmatic offerings that utilize various advertising
network exchanges to manage our ad stack. A significant portion of the advertising revenue generated by our Media business is
derived from our agreements with Google. See “Item 1A. Risk
Factors—We
depend
upon
certain
arrangements
with
Google
for
a
significant
portion
of
our
revenue.
A
termination
of,
or
a
loss
of
revenue
generated
from,
our
agreements
with
Google
would
have
a
material
adverse
effect
on
our
business,
financial
condition
and
results
of
operations.”
Competition
We operate in highly competitive and developing industries that are characterized by rapid technological change, various
business models and frequent disruption of incumbents by innovative entrants.
Marketplaces
. Our art and design marketplaces compete with a wide variety of online and brick-and-mortar companies
selling comparable products. Society6 primarily competes with companies that utilize a print-on-demand model
whereby consumer products are produced and shipped to customers with selected artist generated designs printed on them, such as
RedBubble, Zazzle and Minted, as well as companies that offer broader home décor and apparel products, such as Etsy and
Wayfair. Saatchi Art competes with traditional offline art galleries, art consultants and other online properties selling original
artwork, such as Artfinder, Artspace, Ugallery, Vango, eBay and Amazon Art. The Other Art Fair competes with various art fairs,
and in particular fairs that feature reasonably priced artwork from emerging artists such as The Affordable Art Fair. Our
marketplaces must successfully attract, retain and engage both buyers and sellers to use our platforms and attend our fairs. We
believe that the principal competitive factors for such marketplaces include the quality, price and uniqueness of the products,
artwork or services being offered; the selection of goods and artists featured; the ability to source numerous products efficiently
and cost-effectively with respect to our print-on-demand products; customer service; the convenience and ease of the shopping
experience we provide; and our reputation and brand strength. We expect competition to continue to intensify as online and offline
businesses increasingly compete with each other and the barriers to enter online channels are reduced.
Media
. We face intense competition for our Media service offering from a wide range of competitors. These markets are
rapidly evolving, fragmented and competition could increase in the future as more companies enter the space. We compete for
advertisers on the basis of a number of factors, including return on marketing expenditures, price of our offerings, and the ability
to deliver large audiences or precise types of segmented audiences. Our principal competitors in this space currently include
various online media companies ranging from large Internet media companies to specialized and enthusiast properties that focus
on particular areas of consumer interest, as well as social media outlets such as Facebook, Snapchat and Pinterest, where brands
and advertisers are focusing a significant portion of their online advertising spend in order to connect with their customers. Some
of our competitors have larger audiences and more financial resources than we have and many of our competitors are making
significant investments in order to compete with various aspects of our business.
Many of our current Marketplaces and Media competitors have, and potential competitors may have, substantially greater
financial, marketing and other resources than we have; greater technical capabilities; greater brand recognition; longer operating
histories; differentiated products and services; and larger customer bases. These resources may help some of our competitors and
potential competitors respond more quickly as the industry and technology evolves, focus more on product innovation, adopt more
aggressive pricing policies and devote substantially more resources to website and system development than we do. Additional
information regarding competition is included under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form
10-K.
Intellectual Property
Our intellectual property consists of trademarks, service marks, patents, copyrights and trade secrets, and is, in the
aggregate, important to our business. To protect our proprietary rights, we rely on a combination of intellectual property rights in
the United States and other jurisdictions, including trademarks, patents, copyrights, and trade secret laws,
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together with contractual provisions and technical measures that we have implemented. We rely more heavily on trade secret
protection than patent protection. To protect our trade secrets, we control access to our proprietary systems and technology,
including our platforms and infrastructure. We also enter into confidentiality and invention assignment agreements with our
employees and consultants and confidentiality and non-disclosure agreements with third parties that provide products and services
to us.
We have trademarks registered in the United States and in various countries (some of which are registered in multiple
classes) for some of our core properties, including “Society6” and “eHow”, and we have additional trademark applications
pending in the United States and other jurisdictions. We also have patents granted by the United States Patent and Trademark
Office and other jurisdictions with respect to certain methods, processes and technologies related to our Media service offering
that expire between 2027 and 2033, and we have patent applications pending in the United States and other jurisdictions specific to
our Media service offering. We believe that the duration of our patents is adequate for the current needs of our business. We
generally do not register the copyrights associated with our content with the United States Copyright Office due to the relatively
high costs we would incur to register all of our copyrights.
In addition to the intellectual property we own, we also have licenses to use the “Saatchi” name in connection with our
Saatchi Art marketplace and the “Livestrong.com” name in connection with our Livestrong.com media property, in each case, as
permitted by the terms of intellectual property or licensing agreements with the third parties who retain the ownership rights to
such names. Additional information regarding certain risks related to our intellectual property is included under the heading “Risk
Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Regulation
We are subject to numerous laws and regulations in the United States and abroad, including laws and regulations relating to
freedom of expression; information security; data privacy and data collection; pricing and fees; employment related matters;
online content and the distribution of content; intellectual property rights, including secondary liability for infringement by others;
product liability claims; taxation, including sales and value-added taxes (“VAT”); online advertising and marketing, including
email marketing, unsolicited commercial email, native advertising and sponsored content; and the use of social media influencers.
In the United States, Congress has adopted legislation that regulates certain aspects of the Internet, including the
Communications Decency Act, the Digital Millennium Copyright Act, the Lanham Act, the Anticybersquatting Consumer
Protection Act, the CAN-SPAM Act and the Federal Trade Commission Act. Advertising and promotional information presented
to visitors on our online properties, our related social media channels and through our other marketing activities are subject to
federal and state consumer protection laws and regulations that govern unfair and deceptive practices. Because we operate large
consumer-facing media properties and marketplace platforms, we are also subject to state, federal and foreign laws and regulations
governing privacy of users’ search and purchasing habits and other information, including requirements related to the collection
and protection of consumers’ non-public personal information, user preferences and similar personal data. We believe that we will
also be subject to the General Data Protection Regulation (“GDPR”), which was enacted in the European Union in May 2016,
becomes effective in May 2018 and relates to data protection and privacy.
We must also comply with certain foreign and U.S. laws and regulations that apply to our international operations,
including restrictions imposed by the Foreign Corrupt Practices Act (“FCPA”) and the economic and trade sanctions administered
by the Office of Foreign Assets Control (“OFAC”) and the U.S. Commerce Department based on U.S. foreign policy and national
security goals against targeted foreign states, organizations and individuals. Additionally, some of the products and services we
provide to customers globally may require approval under applicable U.S. export and customs laws. Federal, state, local and foreign governments are also considering other legislative and regulatory proposals that would
regulate the Internet in more and different ways than exist today, including with respect to taxes. New laws and regulations, or new
interpretations of existing laws and regulations, may significantly impact our business. The costs of compliance with the various
laws and regulations applicable to us are high and may increase in the future and any failure
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to comply with applicable laws and regulations may subject us to additional liabilities and penalties. See “Risk Factors” in Part I,
Item 1A of this Annual Report on Form 10-K for additional information.
Employees
As of December 31, 2016, we had approximately 265 employees. None of our employees is represented by a labor union or
is subject to a collective bargaining agreement. We believe that relations with our employees are good.
Seasonality
Our Marketplaces service offering is affected by traditional retail seasonality and there is generally increased sales activity
on our marketplaces platforms during the fourth quarter holiday season. Both our Marketplaces and Media service offerings are
also affected by seasonal fluctuations in Internet usage, which generally slows during the summer months. These seasonal trends
have caused, and will likely continue to cause, fluctuations in our quarterly results .
Available Information
We file reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and any other filings required by the SEC. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports are made available free of charge in the investor relations section of our
corporate website (http://ir.leafgroup.com) as soon as reasonably practicable after such material is electronically filed with or
furnished to the SEC. The public may also read and copy any materials we file with the SEC at the SEC's Public Reference Room
at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on
the investor relations section of our corporate website. Additionally, we provide notifications of news or announcements regarding
our financial performance, including SEC filings, investor events, and press and earnings releases, on the investor relations section
of our corporate website. Investors and others can receive notifications of press releases and SEC filings by signing up for email
alerts. Investors and others should note that we also use social media to communicate with the public about our company, our
services and other issues. It is possible that the information we post on social media could be deemed to be material information.
Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the
social media channels listed on the investor relations section of our corporate website. Further corporate governance information,
including our corporate governance guidelines, board committee charters and code of business conduct and ethics, is also available
on the investor relations section of our corporate website under the heading “Corporate Governance.”
Any references to our corporate website address in this Annual Report on Form 10-K are intended to be inactive textual
references only. None of the information contained on our website is part of this Annual Report on Form 10-K or incorporated by
reference into this report or any other report or document we file with the SEC.
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Item 1A. Risk Factors
In addition to the other information set forth in this Annual Report on Form 10-K, you should consider carefully the risks
and uncertainties described below, which could materially adversely affect our business, financial condition and results of
operations.
Risks Relating to our Business
If
we
are
unable
to
successfully
drive
traffic
to
our
marketplaces
and
media
properties
and
expand
the
customer
base
for
our
marketplaces,
our
business,
financial
condition
and
results
of
operations
would
be
adversely
affected.
In order for our businesses to grow, we must attract new visitors and customers to our marketplaces and media properties
and retain our existing visitors and customers. One of the key factors to growing our marketplace platforms is expanding our
customer base. Our ability to attract new customers, some of whom may already purchase similar products from our competitors,
depends in part on our ability to successfully drive traffic to our marketplaces using social media platforms, e-mail marketing
campaigns and promotions, paid referrals and search. We may incur significant expenses related to customer acquisition and the
net sales from new customers may not ultimately exceed the cost of acquiring these customers. Additionally, we believe that many
of the new customers for our marketplaces originate from word-of-mouth and other non-paid referrals from existing customers. If
we fail to deliver a differentiated consumer experience or if customers do not perceive the products sold through our marketplaces
to be of high value and quality, we may have difficulty retaining our existing customers and attracting new customers through
referrals and other channels. Our success in attracting traffic to our media properties and converting these visitors into repeat users depends, in part, upon
our ability to identify, create and distribute high-quality content through engaging products and our ability to meet rapidly
changing consumer demand. We may not be able to identify and create the desired content and produce an engaging user
experience in a cost-effective or timely manner, if at all. As discussed further below, we depend on search engines to direct a
significant amount of traffic to our media properties and we utilize search engine optimization efforts to help generate search
referral traffic to our media properties. If we are unable to successfully modify our search engine optimization practices in
response to changes in search engine algorithms and search query trends, or if we are unable to generate increased traffic from
other sources such as social media, e-mail, direct navigation and online marketing activities, we could experience substantial
declines in traffic to our media properties and to our partners’ media properties, which would adversely impact our business,
financial condition and results of operations.
If
Internet
search
engines
continue
to
modify
their
methodologies,
traffic
to
our
online
properties,
and
particularly
to
our
media
properties,
could
decline
significantly.
We depend on various Internet search engines, such as Google, Bing and Yahoo!, to direct a significant amount of traffic to
our properties, including media properties that we host for our partners. Our media properties are particularly dependent on search
referral traffic. For the year ended December 31, 2016, based on our internal data, a majority of the traffic directed to eHow and
Livestrong.com came directly from Internet search engines and more than half of the traffic from search engines came from
Google. Changes in the methodologies or algorithms used by search engines to display results could cause our properties to
receive less favorable placements in, or be removed from, the search results. In addition, search engine providers typically display,
together with organic search results, content and links that may divert traffic from the pages referenced in the organic search
results, including paid search results and content and links selected by the search engine provider. Accordingly, even if we rank
highly in organic search results, traffic to our properties may still decline as a result of paid search results and other content
included on the search results page generated by a search query. Internet search engines could also decide that content on our
media properties, or the size and placement of ad units displayed on webpages hosting our content, is unacceptable or violates
their policies. Internet search engines could also view changes made to our properties unfavorably, leading to lower search result
rankings and a decrease in search referral traffic, including to the category-specific sites that we have recently launched. Google, Bing and Yahoo! regularly deploy changes to their search engine algorithms. Since 2011, we have experienced
fluctuations in the total number of Google search referrals to our properties. During 2013, we experienced
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several negative changes in Google referrals to our media properties that, in the aggregate, were larger in magnitude than those we
had previously experienced. Beginning in 2014, Bing and Yahoo! began to implement similar changes to their search engine
algorithms. The changes to search engine algorithms by Google, Bing and Yahoo! have resulted in, and may continue to result in,
substantial declines in traffic directed to our media properties, particularly eHow, which contributed to significant and sustained
revenue declines from our media properties. Any future or ongoing changes made by search engines that negatively impact the
volume of search referral traffic to any of our media or marketplace properties could materially and adversely affect our business,
financial condition and results of operations.
We
generate
the
majority
of
our
Media
revenue
from
advertising.
A
reduction
in
advertising
revenue,
including
as
a
result
of
lower
ad
unit
rates,
increased
availability
of
ad
blocking
software,
lower
online
advertising
spend,
a
loss
of
advertisers
or
lower
advertising
yields,
could
seriously
harm
our
business,
financial
condition
and
results
of
operations.
We currently generate the majority of our Media revenue from advertisements displayed on our media properties, and we
expect to continue to derive a significant amount of our Media revenue from advertising. For the years ended December 31, 2016,
2015 and 2014, after giving effect to the Separation, we generated 37%, 53% and 70%, respectively, of our total revenue from
advertising and nearly all of our Media revenue is generated from advertising. We have experienced declines in ad unit rates for
both desktop and mobile since 2014, resulting in lower advertising revenue, and any further reductions in ad unit rates would
negatively impact our financial results. In addition, an increasing percentage of our content is now consumed on social media
platforms, which do not monetize as well as the same content consumed on our sites. Software developers have also increased the
availability of ad blocking software, particularly on mobile devices. Increased adoption of ad blocking software by users could
reduce our advertising revenue and negatively impact our financial results.
We also believe that advertising spend on the Internet, as in traditional media, fluctuates significantly as a result of a variety
of factors, many of which are outside of our control. These factors include variations in expenditures by advertisers due to
budgetary constraints; the cyclical and discretionary nature of advertising spending, including the perceived impact of campaign
strategies; general economic conditions, as well as economic conditions specific to the Internet and media industry; and the
occurrence of extraordinary events, such as natural disasters, terrorist attacks or political instability. Brands and advertisers are
also increasingly focusing a portion of their online advertising budgets on social media platforms such as Facebook, Snapchat,
Instagram and Pinterest. If this trend continues and we are unable to offer competitive or similarly valued advertising opportunities
across our media properties, our revenue from advertising could be adversely impacted. An inability to maintain or increase our
advertising revenue would have a material adverse effect on our business, financial condition and results of operations.
Additionally, our advertising strategy is currently focused on both direct sales channels with brands and advertising
agencies, including native and sponsored ad campaigns, as well as programmatic offerings that utilize various advertising network
exchanges, including exchanges operated by Google and Index Exchange. Operating on a programmatic basis requires us to
actively manage the sale of our ad inventory on these exchanges. An inability to successfully manage our ad stack, including the
programmatic process and our direct sales team, could have a material adverse effect on our business, financial condition and
results of operations.
One component of our platform that we use to generate advertiser interest is our system of monetization tools, which is
designed to match content with advertisements in a manner that optimizes revenue yield and end-user experience. Advertising
providers and advertisers will stop placing advertisements on our media properties if their investments do not generate sales leads,
branding opportunities and customer awareness, or if we do not deliver their advertisements in an appropriate and effective
manner. The failure of our yield-optimized monetization technology to effectively match advertisements with our content in a
manner that results in increased revenue for advertisers would have an adverse impact on our ability to maintain or increase our
revenue from advertising. If any of our advertisers or advertising providers, and in particular Google, decides not to continue
advertising on, or providing advertisements to, our media properties, or modifies its advertising policies in a manner that could
negatively impact yield, we could experience a rapid decline in our revenue over a relatively short period of time.
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We
depend
upon
certain
arrangements
with
Google
for
a
significant
portion
of
our
revenue.
A
termination
of,
or
a
loss
of
revenue
generated
from,
our
agreements
with
Google
would
have
a
material
adverse
effect
on
our
business,
financial
condition
and
results
of
operations.
We have an extensive relationship with Google and a significant portion of our total revenue is generated by advertising
provided by Google. For the years ended December 31, 2016, 2015 and 2014, after giving effect to the Separation, we derived
approximately 27%, 36% and 50%, respectively, of our total revenue from our arrangements with Google. Google provides both
cost-per-click advertisements and cost-per-impression advertisements to our media properties and we receive a portion of the
revenue generated by such advertisements. We also utilize Google’s DoubleClick Ad Exchange, an auction marketplace, to sell
display advertising space on our media properties. In addition, we use Google’s DoubleClick ad serving technology to deliver
advertisements to our media properties. Our primary services agreement with Google, which governs certain of our advertising
and search relationships with Google, is set to expire in October 2017. Google has the right to terminate its agreements with us
prior to their expiration upon the occurrence of certain events, including if Google reasonably believes that our use of its services
violates the rights of third parties, and other breaches of contractual provisions, a number of which are broadly defined. In
addition, Google is permitted to discontinue the provision of certain services to us under our primary services agreement at
specified times, in its sole discretion. If Google terminates our agreements with it or ceases to provide certain key advertising
services to us, or if we are unable to enter into new agreements with Google on terms and conditions favorable to us prior to the
expiration of the current agreements, we may not be able to enter into agreements with alternative third party advertisement
providers or for alternative ad serving platforms on acceptable terms or on a timely basis or both.
Furthermore, our advertising agreements with Google may not continue to generate the same level of revenue that we have
received from such arrangements during past periods for a variety of reasons, including a reduction in the amounts Google is able
to charge advertisers and the possibility that certain of our media properties do not generate sufficient traffic to realize our
maximum revenue share percentage with Google. Our ability to generate advertising revenue from Google also depends, in part,
on Google’s assessment of the quality and performance characteristics of Internet traffic resulting from advertisements placed on
our media properties. In addition, Google may at any time change the nature of, or suspend, the services that it provides to
advertisers and the catalog of advertisers from which advertisements are sourced, or modify its policies with respect to how
advertisements may be displayed on a webpage. These types of changes or suspensions would adversely impact our ability to
generate revenue from our advertising agreements with Google. Any termination of or change in the services that Google provides
to us, or a loss of revenue generated by our advertising agreements with Google, would have a material adverse effect on our
business, financial condition and results of operations.
Mobile
devices
are
increasingly
being
used
to
access
the
Internet
and,
in
addition,
our
content
is
increasingly
being
consumed
on
social
media
platforms.
Advertising
yields
on
both
mobile
web
and
social
media
platforms
are
lower
on
average
than
desktop
yields
directly
on
our
websites,
which
could
negatively
impact
our
business,
financial
condition
and
results
of
operation.
The number of people who access the Internet through mobile devices such as smartphones and tablets, rather than through
desktop or laptop computers, has increased substantially in recent years. Additionally, individuals are increasingly consuming
content through social media platforms. If we cannot effectively distribute our media content, products and services on these
devices or through these platforms, we could experience a decline in visits and traffic and a corresponding decline in revenue. It is
also more difficult to display advertisements on mobile devices without disrupting the consumer experience. We have made, and
may make further, changes to the layouts and formats of our mobile sites in order to improve the user experience or comply with
the requirements of our advertising partners, which could negatively impact our monetization efforts on mobile devices. In
addition, advertising yields on both mobile web and social media platforms on average are currently lower than desktop yields
directly on our websites. The significant increase in consumption of our media content on mobile devices and through social
media platforms has contributed to a reduction in our Media revenue per one thousand visits, or RPVs. As a result of these factors,
the increasing use of mobile devices and social media platforms to access our content could negatively impact our business,
financial condition and results of operations.
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Table of Contents
Certain
changes
to
the
business
model
for
our
Media
service
offering
and
related
expenditures
could
negatively
impact
our
operating
margins
in
the
near-term
and
may
not
lead
to
increased
revenue
in
the
long-term.
As part of the transformation of our Media business, we have taken various actions and incurred significant expenses to
improve the user experience and engagement on certain of our media properties by redesigning the websites; removing duplicative
or low-quality content; reducing the ad unit density; changing the format of ad units; improving the mobile experience and adding
products and user engagement tools. Such actions do not directly generate related revenue and certain changes will likely
negatively impact our revenue and operating margins in the near-term. In particular, between 2013 and 2015, we removed a
significant amount of content from eHow and Livestrong.com and reduced the number of ad units on each page, which
collectively resulted in a large decrease in revenue and may continue to negatively impact revenue and operating margins due to
the reduction in content and ad units generating advertising revenue on these sites. We may also incur additional expenses in order
to further improve the product and user experience associated with our media properties.
In addition, in the second half of 2016, we began launching several category-specific media properties leveraging topics and
content from eHow because we feel that more narrowly focused media properties with a distinct editorial voice now resonate
better with audiences and advertisers. These category-specific media properties currently include: Cuteness.com, a community for
pet owners and animal lovers; Techwalla.com, a site that provides expansive reviews and information on tech products for your
home and family; LEAF.tv, a site with rich content in living, eating, and fashion; and Sapling.com, a millennial source for
information on personal finance. We may receive lower advertising rates on the new properties as compared to eHow, particularly
when the new properties are first launched, and the content that is moved may not ultimately generate the same or increased traffic
on the new category-specific properties. These recent changes and any additional changes may not result in increased visits to, or
increased revenue generated by, our media properties in the aggregate in the near-term or long-term.
If
we
are
unable
to
attract
new
customers
to
our
marketplaces
and
successfully
grow
our
marketplaces
business,
our
business,
financial
condition
and
results
of
operations
could
be
adversely
affected.
We operate leading art and design marketplaces, as well as a leading art fair for discovering emerging artists. If we are
unable to attract new customers to our marketplaces and successfully grow these platforms, our business and results of operation
would be adversely affected.
The success of our marketplaces is dependent upon a number of factors, including:
·
demand for these types of products and market acceptance of our products and services;
·
our ability to attract and retain new customers;
·
increased brand awareness and the reputation of our marketplaces;
·
our ability to increase conversion rates and average order values;
·
our ability to maintain the artist communities on Society6 and Saatchi Art so that artists continue to contribute and
maintain their original artwork and designs on these marketplaces;
·
our ability to cost-effectively introduce and market new products on Society6 on a timely basis to address changing
consumption trends and consumer preferences and to differentiate us from our competitors; ·
our ability to identify and attract local artists who will drive attendance and art sales at fairs hosted by The Other Art
Fair;
·
the success and competitiveness of new entrants into this highly competitive industry;
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·
competitive pricing pressures, including potential discounts offered to attract customers and reduced or free shipping;
·
maintaining significant strategic relationships with our print-on-demand suppliers and ensuring the costs and quality of
their products and the timeliness of our production cycle for our art and design marketplaces;
·
disruptions in the supply-chain, production and fulfillment operations associated with the print-on-demand products
sold through our art and design marketplaces;
·
our ability to source reliable local vendors as we look to expand internationally;
·
our ability to identify local art directors and personnel to efficiently operate fairs hosted by The Other Art Fair in
multiple countries;
·
shipping disruptions or delays with the products sold through our online marketplaces;
·
the return rate for products sold through our marketplaces;
·
the overall growth rate of e-commerce and marketplaces;
·
overall changes in consumer spending on discretionary purchases; and
·
legal claims, including copyright and trademark infringement claims, right of publicity claims and product liability
claims, which may expose us to greater litigation costs in the future as compared to historical levels.
If we are unable to successfully grow our marketplaces, including as a result of lower customer growth or retention than
expected, or if the revenue generated from initiatives related to our marketplaces is less than the costs of such initiatives, our
business, financial condition and results of operations could be materially and adversely affected.
If
the
mobile
solutions
available
to
buyers
and
sellers
using
our
online
marketplaces
are
not
effective,
the
growth
prospects
for
our
marketplaces
could
decline
and
our
marketplaces
revenue
and
business
could
be
adversely
affected.
Consumers are increasingly conducting online shopping on mobile devices, including smartphones and tablets, rather than
on desktop computers. Although we continually strive to improve the mobile experience for users of Society6 and Saatchi Art
accessing our marketplaces through mobile devices, the smaller screen size and reduced functionality associated with some mobile
device interfaces may make the use of our marketplace platforms more difficult or less appealing to our members. Historically,
visits to our marketplaces on mobile devices have not converted into purchases as often as visits made through desktop computers
and the average order value for mobile transactions has been lower than desktop transactions. Society6 and Saatchi Art sellers are
also increasingly using mobile devices to operate and monitor their accounts on our platforms and if we are not able to deliver a
rewarding experience to sellers using mobile devices, our Marketplaces service offering may suffer. If our members encounter
difficulty accessing or using our marketplace platforms on their mobile devices, or if our members choose not to use our
marketplace platforms on their mobile devices, the growth prospects for our marketplaces could decline. Additionally, if
conversion rates and average order values for mobile transactions on our marketplaces do not increase, our marketplaces revenue
and results of operation for our Marketplaces service offering may be adversely affected.
We
face
significant
competition,
which
we
expect
will
continue
to
intensify,
and
we
may
not
be
able
to
maintain
or
improve
our
competitive
position
or
market
share.
We operate in highly competitive and still developing markets. The industries in which we compete are characterized by
rapid technological change, various business models and frequent disruption of incumbents by innovative entrants. There can be
no assurance that we will be able to compete successfully against current or future
15
Table of Contents
competitors and a failure to increase, or the loss of, market share, would likely seriously harm our business, financial condition
and results of operations.
Marketplaces
Our art and design marketplaces compete with a wide variety of online and brick-and-mortar companies selling comparable
products. Society6 primarily competes with companies that utilize a print-on-demand model whereby consumer products are
produced and shipped to customers with selected artist generated designs printed on them , such as RedBubble, Zazzle and Minted,
as well as companies that offer broader home décor and apparel products, such as Etsy and Wayfair . Saatchi Art competes with
traditional offline art galleries, art consultants and other online properties selling original artwork, such as Artfinder, Artspace,
Ugallery, Vango, eBay, and Amazon Art. The Other Art Fair competes with various art fairs, and in particular fairs that feature
reasonably priced artwork from emerging artists such as The Affordable Art Fair. We expect competition to continue to intensify
as online and offline businesses increasingly compete with each other, and because the barriers to entry into online channels can be
low.
Our marketplace platforms must successfully attract, retain and engage both buyers and sellers to use our platforms. We
believe that the principal competitive factors for our marketplaces include the quality, price and uniqueness of the products,
artwork or services being offered; the selection of goods and artists featured; the ability to source numerous products efficiently
and cost-effectively with respect to our print-on-demand products; customer service; the convenience and ease of the shopping
experience we provide; and our reputation and brand strength.
Many of the current competitors to our Marketplaces service offering have, and potential competitors may have, longer
operating histories, larger customer bases, greater technical capabilities, greater brand recognition, differentiated products and
services, and substantially greater financial, marketing and other resources than we have. These resources may help some of our
competitors and potential competitors react more quickly as the industry evolves, focus more on product innovation, and devote
substantially more resources to website and system development than we do. Some of the competitors to our online marketplaces
may offer or continue to offer faster and/or free shipping, more favorable return policies or other transaction-related services
which improve their user experience, but which could be impractical or inefficient for us to implement. Some of our competitors
may be able to use the advantages of brick-and-mortar stores or other sorts of physical presence to build their customer bases and
drive sales. Our competitors may engage in more extensive research and development efforts, undertake more far-reaching
marketing campaigns and adopt more aggressive pricing policies, which may allow them to build larger customer bases or
generate net sales from their customer bases more effectively than we do. For all of these reasons, we may not be able to compete
successfully against the current and potential competitors to our art and design marketplaces.
Media
We face intense competition for our Media service offering from a wide range of competitors. We compete for advertisers
on the basis of a number of factors including return on marketing expenditures, price of our offerings and the ability to deliver
large audiences or precise types of segmented audiences. Our current principal competitors include:
·
Online
Media
Properties
. We compete with numerous Internet media companies, some of which have much larger
audiences and financial resources than we have, for online marketing budgets. We also compete with companies and
individuals that provide specialized consumer information online, including through enthusiast websites, message
boards and blogs. These competitors compete with us across several areas of consumer interest including do-it-yourself,
health and healthy living, home and garden, fashion and beauty, crafts, personal finance, technology and pets.
·
Social
Media
Outlets
. We compete with social media outlets such as Facebook, Snapchat, Instagram and Pinterest,
where brands and advertisers are focusing a significant portion of their online advertising spend in order to connect with
their customers.
Our Media service offering may face increased future competition if any of our competitors devote increased resources to
more directly address the online market for the professional creation and distribution of content. Many of
16
Table of Contents
our current and potential competitors enjoy substantial competitive advantages, such as greater brand recognition, longer operating
histories, substantially greater financial, marketing and other resources, greater technical capabilities, access to larger customer
bases and, in some cases, the ability to combine their online marketing products with traditional offline media such as newspapers
or magazines. These companies may use these advantages to offer products and services similar to ours at a lower price, develop
different products to compete with our current offerings and respond more quickly and effectively than we can to new or changing
opportunities, technologies, standards or customer requirements. For example, if Google chose to compete more directly with us,
we may face the prospect of the loss of business or other adverse financial consequences due to Google’s significantly greater
customer base, financial resources, distribution channels and patent portfolio. Given the intense competition that our Media service
offering faces, we may be unable to maintain or improve our competitive position or market share. We
rely
on
freelance
artists
to
generate
the
artwork
and
designs
sold
through
our
art
and
design
marketplaces.
We
may
not
be
able
to
attract
or
retain
enough
artists
to
generate
artwork
and
designs
on
a
scale
or
of
a
quality
sufficient
to
grow
our
business.
Our art and design marketplaces rely on artists to join our communities and contribute original artwork and designs that they
seek to sell or monetize through the sale of art prints and other print-on-demand consumer products in the home décor,
accessories, and apparel categories. We rely on freelance artists to upload their unique art designs to Society6 or sell their original
artwork on Saatchi Art, or at fairs hosted by The Other Art Fair, and we may not be able to attract or retain enough artists to
generate artwork and designs on a scale or of a quality sufficient to grow our business. Furthermore, our competitors may attempt
to attract members of our artist communities by offering compensation and revenue-sharing arrangements that we are unable to
match. If we are unable to continue attracting artists to our marketplaces, our revenues from sales of artwork and print-on-demand
products will decrease, which would have a negative impact on our business, financial condition and results of operations. We
may
not
be
successful
in
expanding
our
current
product
or
service
offerings,
or
expanding
into
new
lines
of
business,
which
could
limit
our
future
growth.
Important potential areas of growth for us are the development of new product and service offerings and the acquisition or
internal development of new lines of business. New product and service offerings and new lines of business may be subject to
significant business, economic and competitive uncertainties and contingencies frequently encountered by new businesses in
competitive environments, many of which are beyond our control, including lack of market acceptance. If we develop or acquire
new lines of business or new product or service offerings, we may not be able to effectively integrate and manage these new
businesses and we may not recover the funds and resources we expend on developing or acquiring them. If we are unable to
successfully expand the products and services we offer, or expand into new lines of business, our future growth would be limited
which could have a negative effect on our business, financial condition and results of operations.
Poor
perception
of
our
brands
or
business
could
harm
our
reputation
and
adversely
affect
our
business,
financial
condition
and
results
of
operations.
Our Media service offering is dependent on attracting a large number of visitors to our media properties and providing leads
and clicks to our advertisers, which depends in part on our reputation within the industry and with our users. Perception that the
quality of our content may not be the same or better than that of other published Internet content, even if baseless, can damage our
reputation. In addition, Livestrong.com is a licensed trademark from the Livestrong Foundation and there has been negative
publicity surrounding Mr. Armstrong in the past. Any damage to the reputation of our brands could harm our ability to attract and
retain advertisers, visitors, partners, customers and artists, which would materially adversely affect our business, financial
condition and results of operations.
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Table of Contents
We
depend
upon
the
quality
of
traffic
to
our
media
properties
to
provide
value
to
advertisers
and
excessive
low-quality
traffic
could
have
a
material
adverse
effect
on
the
value
of
such
media
properties
to
our
third
party
advertisement
distribution
providers
and
advertisers,
and
thereby
adversely
affect
our
revenue.
We depend upon the quality of traffic to our media properties to provide value to advertisers. Low-quality traffic can include
clicks associated with non-human processes, including robots, spiders or other software; the mechanical automation of clicking;
and other types of invalid clicks or click fraud. There is a risk that a certain amount of low-quality traffic, or traffic that is deemed
to be invalid by advertisers, will be delivered to advertisers on our media properties. As a result, we may be required to credit
future amounts owed to us by our advertising partners or repay them for amounts previously received if such future amounts are
insufficient. Furthermore, low-quality or invalid traffic may be detrimental to our relationships with third party advertisement
distribution providers and advertisers and could adversely affect our revenue.
Risks Relating to our Company
We
have
a
history
of
operating
losses
and
may
not
be
able
to
operate
profitably
or
generate
positive
cash
flow.
We were founded in 2006 and, except for the year ended December 31, 2012, when we generated net income, we have had a
net loss in every year since inception, including generating a net loss of $2.0 million for the year ended December 31, 2016. As of
December 31, 2016 we had an accumulated deficit of approximately $397.6 million and we may continue to incur net operating
losses in the future. Moreover, our cash flows from operating activities do not currently cover all of our operating expenses, and
we may not generate sufficient cash to cover operating expenses for the foreseeable future. Our ability to generate net income in
the future will depend in large part on our ability to generate and sustain substantially increased revenue levels, while continuing
to control our expenses. We may incur significant operating losses in the future for a number of reasons, including those discussed
in other risk factors and factors that we cannot foresee, and we may be unable to generate net income or sufficient positive cash
flows.
We
may
not
be
able
to
obtain
capital
when
desired
on
favorable
terms,
if
at
all,
or
without
substantial
dilution
to
our
stockholders,
which
may
impact
our
ability
to
execute
on
our
current
or
future
business
strategies.
We anticipate that our current cash, cash equivalents and cash provided by operating activities will be sufficient to fund our
operations for the next 12 months. It is possible, however, that we may not generate sufficient cash from operations or otherwise
have the capital resources to meet our future capital needs, including to invest in areas for growth, and we do not currently have a
line of credit in place if we need to borrow funds. If we do not generate sufficient cash from operations or otherwise have
sufficient capital resources available, we may need to enter into a new financing arrangement or dispose of certain assets to
execute on our current or future business strategies, including developing new or investing in existing lines of business,
maintaining our operating infrastructure, acquiring complementary businesses, hiring additional personnel or otherwise responding
to competitive pressures. We cannot assure you that financing arrangements will be available to us on favorable terms, or at all.
Furthermore, if we raise additional funds through the issuance of convertible debt or equity securities, the percentage ownership of
our existing stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or
privileges senior to those of existing stockholders. Any debt financing that we may secure in the future could include restrictive
covenants relating to our capital raising activities, buying or selling assets and other financial and operational matters, which may
make it more difficult for us to obtain additional capital, manage our business and pursue business opportunities. If adequate
funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, meet
obligations in the normal course of business, take advantage of strategic opportunities, or otherwise respond to competitive
pressures would be significantly limited.
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In
connection
with
the
Separation,
our
operational
and
financial
profile
changed
leaving
us
with
a
narrower
business
focus.
In
addition,
if
there
is
a
determination
that
the
Separation
is
taxable
for
U.S.
federal
income
tax
purposes,
then
we
and
our
stockholders
that
are
subject
to
U.S.
federal
income
tax
could
incur
significant
U.S.
federal
income
tax
liabilities.
On August 1, 2014, we completed the Separation of Rightside from Leaf Group (formerly known as Demand Media).
Following the Separation, we became a smaller company focused on our Marketplaces and Media businesses. This narrower
business focus may leave us more vulnerable to changing market conditions and the diminished diversification of revenue, costs,
and cash flows could cause our results of operation, cash flows, working capital and financing requirements to be subject to
increased volatility. In addition, we may be unable to achieve some or all of the strategic and financial benefits that we expected
would result from the Separation, or such benefits may be delayed, which could materially and adversely affect our business,
financial condition and results of operations.
In connection with the Separation, we received a private letter ruling from the Internal Revenue Service (“IRS”), together
with an opinion of Latham & Watkins LLP, tax counsel to us (the “Tax Opinion”), substantially to the effect that, among other
things, the Separation qualifies as a tax-free transaction for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D)
of the Internal Revenue Code of 1986, as amended (the “Code”). The private letter ruling and Tax Opinion relied on certain facts,
assumptions, representations and undertakings from us and Rightside regarding the past and future conduct of the companies’
respective businesses and other matters. The private letter ruling did not address all of the requirements for determining whether
the Separation would qualify for tax-free treatment, and the Tax Opinion, which addressed all such requirements but relied on the
private letter ruling as to matters covered by the ruling, is not binding on the IRS or the courts. Notwithstanding the private letter
ruling and the Tax Opinion, the IRS could determine after conducting an audit that the Separation should be treated as a taxable
event if it determines that any of these facts, assumptions, representations or undertakings is not correct or have been violated or if
it disagrees with the conclusions in the Tax Opinion that are not covered by the private letter ruling, or for other reasons, including
as a result of certain significant changes in the stock ownership of us or Rightside after the Separation.
If the Separation ultimately is determined to be a taxable transaction, we would be subject to tax as if we had sold the
Rightside common stock in a taxable sale for its fair market value, and our stockholders would be subject to tax as if they had
received a taxable distribution equal to the fair market value of Rightside’s common stock that was distributed to them. Under the
tax matters agreement that we entered into with Rightside (the “Tax Matters Agreement”), we may be required to indemnify
Rightside against all or a portion of the taxes incurred by Rightside in the event the Separation were to fail to qualify for tax-free
treatment under the Code. If we are required to pay any tax liabilities in connection with the Separation pursuant to the Tax
Matters Agreement or pursuant to applicable tax law, the amounts may be significant.
The
intangible
assets
and
goodwill
on
our
balance
sheet
may
be
subject
to
impairment.
If
our
intangible
assets
or
goodwill
become
impaired
we
may
be
required
to
record
a
significant
non-cash
charge
to
earnings
which
would
have
a
material
adverse
effect
on
our
results
of
operations.
We carry a substantial amount of intangible assets on our balance sheet, primarily from the creation of our long-lived media
content and from certain past acquisitions. We also carry goodwill on our balance sheet from certain acquisitions we have made.
We assess potential impairments to our intangible assets and goodwill when there is evidence that events or changes in
circumstances indicate that the carrying value of such intangible assets or goodwill may not be recoverable. In the third quarter of
2014, we recorded a $232.3 million pretax impairment charge after we determined that the implied fair value of goodwill in our
media reporting unit was substantially lower than its carrying value. We most recently performed our annual impairment analysis
in the fourth quarter of the year ended December 31, 2016, and based on the results, there were no goodwill impairment charges
for the year ended December 31, 2016. Future significant and sustained declines in our stock price and market capitalization
relative to our book value or our inability to generate sufficient revenue or cash flows from our long-lived media content or the
businesses that we have acquired may result in us having to take additional impairment charges against certain of our intangible
assets or goodwill. If we are required to record additional impairment charges in future periods, it could have a material adverse
effect on our results of operations and financial condition, particularly in the period such charge is taken.
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Table of Contents
Our
operating
results
may
fluctuate
on
a
quarterly
and
annual
basis
due
to
a
number
of
factors,
which
may
make
it
difficult
to
predict
our
future
performance.
Our revenue and operating results could fluctuate significantly from quarter-to-quarter and year-to-year due to a variety of
factors, many of which are outside of our control. Therefore, comparing our operating results on a period-to-period basis may not
be meaningful. In addition to other risk factors discussed in this section, factors that may contribute to the variability of our
quarterly and annual results include:
·
lower than anticipated levels of traffic to our media properties;
·
seasonality of the revenue associated with our marketplaces, including increased sales activity during the holiday
season;
·
spikes in sales of our print-on-demand products due to major social or political events resulting in a short-term demand
for products with related content;
·
competitive pricing pressures, including shipping costs and potential discounts offered, associated with the products
sold through our marketplaces;
·
disruptions in the supply-chain, production and fulfillment operations associated with the products sold through our
marketplaces;
·
the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our
services, operations and infrastructure, especially one-time costs related to the development or acquisition of new
products and services;
·
the level of promotional activity required to drive potential customers to our marketplaces;
·
increased costs associated with the acquisition or production of new content for our media properties;
·
changes in Internet advertising purchasing patterns by advertisers and changes in how we sell advertisements;
·
realignment costs associated with shifting priorities for our businesses;
·
timing of and revenue recognition for certain transactions;
·
changes in generally accepted accounting principles;
·
our focus on long-term goals over short-term results; and
·
weakness or uncertainty in general economic or industry conditions.
It is possible that our operating results may fluctuate and our operating results may be below the expectations of public
market analysts and investors in one or more future quarters due to any of the factors listed above, a combination of those factors
or other reasons, which could have a material adverse impact on the price of shares of our common stock.
We
have
made
and
may
make
additional
acquisitions
that
involve
significant
execution,
integration
and
operational
risks
and
we
may
not
realize
the
anticipated
benefits
of
any
such
acquisitions.
We evaluate acquisition and expansion opportunities on an ongoing basis and may pursue select acquisitions. We may
continue to make acquisitions of complementary businesses, websites, solutions, technologies or talent in the future to increase the
scope of our business. The identification of suitable acquisition candidates can be difficult, time20
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consuming and costly. Potential acquisitions require significant attention from our management and could result in a diversion of
resources from our existing businesses, which in turn could have an adverse effect on our business and results of operations. In
addition, the expected benefits of acquisitions may not materialize as planned, including achieving certain financial and revenue
objectives. Certain acquired businesses or the transactions entered into as part of business combinations may also carry contingent
liabilities that could materially impact our future results of operations and financial condition. Furthermore, we may not be able to
successfully complete identified acquisitions. If we are unable to identify suitable future acquisition opportunities, reach
agreement with such parties or obtain the financing necessary to make such acquisitions, we could lose market share to
competitors who are able to make such acquisitions. This loss of market share could negatively impact our business, revenue and
future growth.
Even if we successfully complete an acquisition, we may not be able to successfully assimilate and integrate the acquired
business, websites, assets, technologies, solutions, personnel or operations, particularly if key personnel of an acquired company
decide not to work for us, and we therefore may not achieve the anticipated benefits of such acquisition. Acquisitions also could
harm our reputation or brands generally, as well as our relationships with existing customers or partners. In addition, financing an
acquisition may require us to (i) use substantial portions of our available cash on hand, (ii) incur additional indebtedness, which
would increase our costs and could impose operational limitations, and/or (iii) issue equity securities, which would dilute our
stockholders’ ownership and could adversely affect the price of our common stock. We may also unknowingly inherit liabilities
that arise after the acquisition and are not adequately covered by indemnities, and certain stockholders of an acquired company
may dissent from or object to an acquisition or otherwise seek to assert claims related to the transaction.
We
depend
on
key
personnel
to
operate
our
business,
and
if
we
are
unable
to
retain
our
current
personnel
or
hire
additional
personnel,
our
ability
to
develop
and
successfully
market
our
business
could
be
harmed.
We believe that our future success is highly dependent on the contributions of our executive officers, as well as our ability to
attract and retain highly skilled personnel, including engineers, developers and sales and marketing personnel. Qualified
individuals that are critical to the success of our current and future businesses, including engineers, developers and sales and
marketing personnel, are in high demand, and we may incur significant costs to attract and retain them. All of our officers and
other employees are at-will employees, which means they can terminate their employment relationship with us at any time, and
their knowledge of our business and industry would be difficult to replace. Volatility or under-performance in our stock price may
also affect our ability to attract new employees and retain our existing key employees. Our executive officers and employees may
be more inclined to leave us if the perceived value of equity awards, including restricted stock units and stock options, decline. If
we lose the services of key personnel or do not hire or retain other qualified personnel for key positions, our business and results
of operation could be adversely affected. In addition, we do not maintain “key person” life insurance policies for any of our
executive officers.
Our
business
is
subject
to
online
security
risks,
including
cyberattacks
and
other
security
breaches,
and
any
actual
or
perceived
security
breach
could
have
a
material
adverse
effect
on
our
business,
financial
condition
and
results
of
operations.
Some of our systems, products and services involve the storage and transmission of information regarding our users,
customers, and advertising and publishing partners, and our information technology and infrastructure may be vulnerable to
cyberattacks, malware or security incidents that result in third parties gaining access to such proprietary information. An
increasing number of websites have disclosed online security breaches in recent years, some of which have involved sophisticated
and highly targeted attacks on portions of their websites or infrastructure. Our security measures may be breached and
unauthorized parties may attempt to gain access to our systems and information through various means, including hacking into our
systems or facilities, fraud, employee error, malfeasance, or inserting malicious code or malware into our code base. For example,
in 2014, we determined that an unauthorized individual may have gained access to the user names, email addresses and passwords
of certain eHowNow customers. Additionally, outside parties may attempt to fraudulently induce employees, users, or customers
to disclose sensitive information or take other actions by using fraudulent “spoof” and “phishing” emails. Outside parties may also
subject us to distributed denial of services attacks or introduce viruses or other malware through “trojan horse” programs to our
users’ computers in order to gain access to our systems and the data stored therein. Because the techniques used to obtain
unauthorized
21
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access, disable or degrade service, or sabotage systems change frequently, often are not recognized until launched against a target
and may be difficult to detect for a long time, we may be unable to anticipate these techniques or to implement adequate
preventive measures. Any security breach or unauthorized access could result in a misappropriation of our proprietary information
or the proprietary information of our users, customers or partners, which could result in significant legal and financial exposure, an
interruption in our operations and damage to our reputation. If an actual or perceived breach of our security occurs, or if our
consumer facing sites become the subject of external attacks that affect or disrupt service or availability, the market perception of
the effectiveness of our security measures could be harmed and we could lose users, customers, advertisers or partners, all of
which could have a material adverse effect on our business, financial condition and results of operations. Any security breach at a
company providing services to us or our users, including third party payment processors, could have similar effects and we may
not be fully indemnified for the costs we may incur as a result of any such breach. In addition, we may need to expend significant
resources to protect against security breaches or to address problems caused by a breach, and the coverage limits on our insurance
policies may not be adequate to reimburse us for any losses caused by security breaches.
We
are
subject
to
risks
and
compliance
rules
and
regulations
related
to
the
third
party
credit
card
payment
processing
solutions
integrated
within
our
websites
or
otherwise
used
by
our
businesses.
Many of our customers pay amounts owed to us using a credit card or debit card. For credit and debit card payments, we pay
payment processing fees in addition to interchange and other fees, which may increase over time and raise our operating expenses
and adversely affect our net income. We are also subject to payment card association operating rules, certification requirements
and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to
comply. We believe that we and our payment processing service providers are compliant in all material respects with the Payment
Card Industry Data Security Standard, which incorporates Visa’s Cardholder Information Security Program and MasterCard’s Site
Data Protection standard. However, there is no guarantee that such compliance will be maintained or that compliance will prevent
illegal or improper use of our systems that are integrated with our payment processing providers. If any of our third party payment
processors fails to be in compliance with applicable credit card rules and regulations, we may be required to migrate to an alternate
payment processor which could result in transaction downtime during the migration and/or a loss of customers and have a material
adverse effect on our business, financial condition and results of operations.
If
we
do
not
adequately
protect
our
intellectual
property
rights,
our
competitive
position
and
business
may
suffer.
Our intellectual property, consisting of trademarks, service marks, patents, copyrights and trade secrets, is, in the aggregate,
important to our business. We rely on a combination of trademark, patent, copyright and trade secret laws in the United States and
other jurisdictions, together with contractual provisions and technical measures that we have implemented, to protect our
proprietary rights. We rely more heavily on trade secret protection than patent protection. To protect our trade secrets, we control
access to our proprietary systems and technology, including our platforms and technical infrastructure, and we enter into
confidentiality and invention assignment agreements with our employees and consultants, as well as confidentiality and nondisclosure agreements with third parties that provide products and services to us. We face risks related to our intellectual property,
including that:
·
because of the relatively high cost we would experience in registering all of our copyrights with the United States
Copyright Office, we generally do not register the copyrights associated with our content;
·
our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes
may be limited by our agreements with third parties;
·
our intellectual property rights may not be enforced in jurisdictions where legal protections are weak;
·
any of the trademarks, patents, copyrights, trade secrets or other intellectual property rights that we presently employ in
our business could lapse or be invalidated, circumvented, challenged or abandoned;
·
competitors may design around our protected systems and technology; or
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·
we may lose the ability to assert our intellectual property rights against others.
Effective protection of our trademarks, service marks, copyrights, patents and trade secrets may not be available in all
countries where we currently operate or in which we may operate in the future. Policing unauthorized use of our proprietary rights
can be difficult and costly. In addition, it may be necessary to enforce or protect our intellectual property rights through litigation
or to defend litigation brought against us, which could result in substantial costs, diversion of resources and management attention
and could adversely affect our business, even if we are successful on the merits.
Some
of
our
software
and
systems
contain
open
source
software,
which
may
pose
risks
to
our
proprietary
software
and
solutions.
We use open source software in our software and systems and will continue to use open source software in the future. The
licenses applicable to open source software typically require that the source code subject to the license be made available to the
public and that any modifications or derivative works to open source software continue to be licensed under open source licenses.
In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third
party commercial software, as open source licensors generally do not provide warranties, indemnities or other contractual
protections with respect to the software (for example, non-infringement or functionality). Our use of open source software may
also present additional security risks because the source code for open source software is publicly available, which may make it
easier for hackers and other third parties to determine how to breach our sites and systems that rely on open source software. Any
of these risks could be difficult to eliminate or manage, and, if not addressed, could have a material adverse effect on our business,
financial condition and results of operation.
The
interruption
or
failure
of
our
information
technology
and
communications
systems,
or
those
of
third
parties
that
we
rely
upon,
could
adversely
affect
our
business,
financial
condition
and
results
of
operations.
The availability of our media properties and marketplaces depends on the continuing operation of our information
technology and communications systems. Any damage to or failure of our systems, or those of third parties that we rely upon (e.g.,
co-location providers for data servers, storage devices, and network access), could result in interruptions in our service, which
could reduce our revenue and profits, and damage our brand. Additionally, if our internal processes do not adequately safeguard
against inadvertent coding errors, our online properties may experience disruptions in service and availability. We have previously
experienced certain server outages and computer distributed denial of service attacks, and any future server outages at our data
center facilities or distributed denial of service attacks may cause all or portions of our online media properties or marketplaces to
become unavailable to users. Our systems are also vulnerable to damage or interruption from natural disasters, terrorist attacks,
power loss, telecommunications failures, computer viruses or other attempts to harm our systems. Our data centers are also
subject to break-ins, sabotage and intentional acts of vandalism, and to potential disruptions if the operators of these facilities have
financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning is currently underdeveloped
and does not account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without
adequate notice for financial reasons or other unanticipated problems at our data centers could result in lengthy interruptions in our
service. Delays or interruptions in our service may cause our users, advertisers, partners, customers and/or artists to become
dissatisfied with our offerings and could adversely affect our business.
Furthermore, third party service providers may experience an interruption in operations or cease operations for any reason. If
we are unable to agree on satisfactory terms for continued data center hosting relationships, we would be forced to enter into a
relationship with other service providers or assume hosting responsibilities ourselves. If we are forced to switch hosting facilities,
we may not be successful in finding an alternative service provider on acceptable terms or in hosting the computer servers
ourselves. We may also be limited in our remedies against these providers in the event of a failure of service. We also rely on
third-parties to provide certain components of our technology platform, such as hardware and software providers, and to serve as
operators for our content delivery networks, or CDNs. A failure or limitation of service or available capacity by any of these third
party providers could adversely affect our business, financial condition and results of operations.
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We
rely
on
technology
infrastructure
and
a
failure
to
update
or
maintain
this
technology
infrastructure,
or
difficulty
scaling
and
adapting
our
existing
technology
and
network
infrastructure
to
accommodate
increased
traffic,
could
adversely
affect
our
business.
Significant portions of our content, products and services are dependent on technology infrastructure that was developed
over multiple years. To be successful, our network infrastructure has to perform well and be reliable. The greater the user traffic
and the greater the complexity of our products and services, the more computing power we will need. In the future, we may spend
substantial amounts to purchase or lease data centers and equipment, upgrade our technology and network infrastructure to handle
increased traffic on our online properties and roll out new products and services. Updating and replacing our technology
infrastructure could be challenging to implement and manage, take time to test and deploy, cause us to incur substantial costs,
cause us to suffer data loss, delays or interruptions in service or result in inefficiencies or operational failures. If we do not
successfully update our technology and network infrastructure as needed, or if we experience inefficiencies and operational
failures during such updates, the quality of our products and services and our users’ experience could decline. This could damage
our reputation and lead us to lose current and potential users, advertisers, partners, customers and artists. Failure to update our
technology infrastructure as new technologies become available may also put us in a weaker position relative to a number of our
key competitors. Competitors with newer technology infrastructure may have greater flexibility and be in a position to respond
more quickly than us to new opportunities, which may impact our competitive position in certain markets and adversely affect our
business. The costs associated with any adjustments to our technology and network infrastructure could also harm our operating
results. Cost increases, loss of traffic or failure to accommodate new technologies could harm our business, revenue and financial
condition.
Regulations
concerning
privacy
and
protection
of
data
could
subject
us
to
claims
or
otherwise
harm
our
business
and
changes
in
these
regulations
could
diminish
the
value
of
our
services
and
cause
us
to
lose
visitors
and
revenue.
We receive, process and store large amounts of personally identifiable data, or personal data, from users of our online
properties, including our marketplaces, freelance professionals who provide services to us and artists who post artwork or designs
on our marketplaces. When a user visits one of our websites or certain pages of our content channel customers’ websites, we use
technologies, including “cookies,” to collect information related to the user, such as the user’s Internet Protocol, or IP, address,
demographic information, and history of the user’s interactions with content or advertisements previously delivered by us. The
information that we collect about our users helps us deliver content and advertising targeted to these users.
We post privacy policies on all of our owned and operated websites. These privacy policies set forth our policies and
practices related to the collection, use, sharing, disclosure and protection of personal data. The storing, sharing, use, disclosure and
protection of personal information and user data are subject to federal and state privacy laws as well as the privacy and data
protection requirements of foreign countries that govern the collection, use, retention, sharing and security of personal data and
other information that we receive from and about our users.
The European Community, in particular pursuant to Directive 95/46/EC, or the Directive, has required European Union
member states to implement data protection laws to meet the strict privacy requirements of the Directive. Among other
requirements under the Directive, the Directive regulates transfers of personally identifiable data that is subject to the Directive, or
Directive Personal Data, to third countries, such as the United States, that have not been found to provide adequate protection to
such Directive Personal Data. We have in the past relied upon adherence to the U.S. Department of Commerce’s Safe Harbor
Privacy Principles and compliance with the U.S.-EU and U.S.-Swiss Safe Harbor Frameworks as agreed to and set forth by the
U.S. Department of Commerce, and the European Union and Switzerland, which established a means for legitimizing the transfer
of Directive Personal Data by data controllers in the European Economic Area, or the EEA, to the United States. As a result of the
October 6, 2015 European Union Court of Justice opinion in Case C-362/14 (Schrems v. Data Protection Commissioner) regarding
the adequacy of the U.S.-EU Safe Harbor Framework, the U.S.-EU Safe Harbor Framework is no longer deemed to be a valid
method of compliance with requirements set forth in the Directive (and member states’ implementations thereof) regarding the
transfer of Directive Personal Data outside of the EEA.
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Recently, negotiators from the European Union and United States reached an agreement on a successor to the U.S.-EU Safe
Harbor frameworks, referred to as the EU-U.S. Privacy Shield, and negotiators from Switzerland and the United States reached
agreement on the Swiss-U.S. Privacy Shield. We recently registered for the EU-U.S. Privacy Shield and we intend to register for
the Swiss-U.S. Privacy Shield shorty after it becomes open for registration. However, the future of these programs as means of
legitimizing cross-border data transfers remains uncertain since the EU-U.S. Privacy Shield has already been subject to legal
challenges that are not yet resolved and we cannot rule out the possibility that the Swiss-U.S. Privacy Shield will also be subject to
a legal challenge. If either the EU-U.S. Privacy Shield or the Swiss-U.S. Privacy Shield are invalidated, we would have to
implement an alternative mechanism for legitimizing our cross-border transfers of Directive Personal Data.
We may also experience hesitancy, reluctance, or refusal by European or multi-national customers to continue to use our
services due to the potential risk exposure to such customers as a result of the current data protection obligations imposed on them
by certain data protection authorities. Such customers may also view any alternative approaches to compliance as being too costly,
burdensome, legally uncertain or otherwise objectionable and therefore decide not to do business with us. We may find it
necessary to establish systems to maintain personal data originating from the European Union in the EEA, which may involve
substantial expense and may cause us to need to divert resources from other aspects of our business, all of which may adversely
affect our business.
The Directive will be replaced in time with the European General Data Protection Regulation, which may impose additional
obligations and risk upon our business and which may substantially increase the penalties to which we could be subject in the
event of any non-compliance. We may incur substantial expense in complying with the new obligations to be imposed by the
European General Data Protection Regulation and we may be required to make significant changes in our business operations, all
of which may adversely affect our revenues and our business overall.
Existing privacy-related laws and regulations in the United States and in foreign countries are evolving and subject to
potentially differing interpretations. In addition, new laws may be enacted, new industry self-regulation may be promulgated, or
existing laws may be amended or re-interpreted, in a manner that limits our ability to analyze user data. If requirements regarding
the manner in which certain personal information and other user data are processed and stored change significantly, our business
may be adversely affected, impacting our financial condition and results of operations. In addition, we may be exposed to potential
liabilities as a result of differing views on the level of privacy required for consumer and other user data we collect. Any failure, or
perceived failure, by us or various third party vendors and service providers to comply with applicable privacy policies or with
industry standards or laws or regulations could result in a loss of consumer confidence in us, or result in actions against us by
governmental entities or others, all of which could potentially cause us to lose consumers and revenue.
We may also need to expend significant resources to protect against security breaches, including encrypting personal
information, or remedy breaches after they occur, including notifying each person whose personal data may have been
compromised and offering to provide credit monitoring services. In the event of any data breach, we may be subject to regulatory
investigations, fines and lawsuits. We may also lose actual and potential business in the event of any data security breach.
Third
parties
may
sue
us
for
intellectual
property
infringement
or
misappropriation
or
make
similar
claims
which,
if
successful,
could
require
us
to
pay
significant
damages,
incur
expenses
or
curtail
our
offerings.
We cannot be certain that our internally developed or acquired systems and technologies do not, and will not, infringe the
intellectual property rights of others. In addition, we license content, software and other intellectual property rights from third
parties and may be subject to claims of infringement or misappropriation if such parties do not possess the necessary intellectual
property rights to the products or services they license to us. We have in the past and may in the future be subject to legal
proceedings and claims that we have infringed the patent or other intellectual property rights of a third party. These claims
sometimes involve patent holding companies or other patent owners who have no relevant product revenue and against whom our
own patents may provide little or no deterrence. In addition, third parties may in the future assert intellectual property infringement
claims against our customers for whom we have produced content, which we have agreed in certain circumstances to indemnify
and defend against such claims. Any intellectual property-related infringement or misappropriation claims, whether or not
meritorious, could result in costly litigation and
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Table of Contents
could divert management resources and attention. If we are found liable for infringement or misappropriation, we may be required
to enter into licensing agreements, if available on acceptable terms or at all, pay substantial damages or limit or curtail our systems
and technologies. Also, any successful lawsuit against us could subject us to the invalidation of our proprietary rights. Moreover,
we may need to redesign some of our systems and technologies to avoid future infringement liability. Any of the foregoing could
prevent us from competing effectively and increase our costs.
Additionally, our marketplaces allow individuals to sell their artwork or their original designs printed on art prints and other
consumer products in the home décor, accessories, and apparel categories. On occasion, the designs or products posted to our
online marketplaces, including Society6 or Saatchi Art, may infringe certain copyrights or trademarks or misappropriate the right
of publicity of well-known figures. As a result, we may be the subject of letters, lawsuits and takedown notices from rights
holders, and the Digital Millennium Copyright Act may not provide safe-harbors for all types of infringing content hosted on these
properties. Addressing these types of claims could require us to expend significant time and resources, which could have an
adverse impact on our business and results of operations.
We also have licenses to use the “Saatchi” name in connection with our Saatchi Art marketplace and the “Livestrong.com”
name in connection with our Livestrong.com media property, in each case, as permitted by the terms of intellectual property or
licensing agreements with third parties who retain the ownership rights to such names. These intellectual property or licensing
agreements may be terminated by such third parties if we do not comply with certain requirements in the agreements. If either of
these licensing arrangements was terminated, we would experience business disruption and would have to incur significant
resources to rebrand the relevant business, which could have an adverse impact on our business, financial condition and results of
operations.
As
a
creator
and
a
distributor
of
Internet
content,
we
face
potential
liability
and
expenses
for
legal
claims
based
on
the
nature
and
subject
matter
of
the
content
that
we
create
or
distribute,
or
that
are
accessible
via
our
media
properties.
If
we
are
required
to
pay
damages
or
expenses
in
connection
with
these
legal
claims,
our
business,
financial
condition
and
results
of
operations
may
be
harmed.
As a creator and distributor of original content and third party provided content, we face potential liability in the United
States and abroad based on a variety of theories, including copyright or trademark infringement, defamation, right of publicity,
negligence, unlawful practice of a licensed profession and other legal theories based on the nature, creation or distribution of this
information, and under various laws, including the Lanham Act and the Copyright Act. We may also be exposed to similar liability
in connection with content that we do not create but that is posted to the media properties we own or host for our partners by users
and other third parties through forums, comments, personas and other social media features. In addition, it is possible that visitors
to the media properties that we own or host for our partners could bring claims against us for losses incurred in reliance upon
information provided on such media properties. These claims, regardless of their merit, could divert management time and
attention away from our business and result in significant costs to investigate and defend. If we become subject to these or similar
types of claims and are not successful in our defense, we may be forced to pay damages, some of which may be substantial. If the
content we distribute through our owned and operated media properties or the media properties we host for our partners violates
the intellectual property rights of others or gives rise to other legal claims against us, we could be subject to substantial liability,
which could have a negative impact on our business, financial condition and results of operations.
Certain
U.S.
and
foreign
laws
and
regulations
could
subject
us
to
claims
or
otherwise
harm
our
business.
We are subject to a variety of laws and regulations in the United States and abroad that may subject us to claims or other
remedies. Our failure to comply with applicable laws and regulations may subject us to additional liabilities, which could
adversely affect our business, financial condition and results of operations. Laws and regulations that are particularly relevant to
our business address freedom of expression; information security; privacy and data collection; pricing and fees; employment
related matters; online content and the distribution of content, including liability for user reliance on such content; intellectual
property rights, including secondary liability for infringement by others; product liability claims; taxation, including VAT and
sales tax; online advertising and marketing, including email marketing, unsolicited commercial email, native advertising and
sponsored content. See “ — Regulations
concerning
privacy
and
protection
of
data
could
subject
us
to
claims
or
otherwise
harm
our
business
and
changes
in
these
regulations
could
diminish
the
value
of
our
services
and
cause
us
to
lose
visitors
and
revenue.
”
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In the United States, Congress has adopted legislation that regulates certain aspects of the Internet, including the
Communications Decency Act, the Digital Millennium Copyright Act, the Lanham Act, the CAN-SPAM Act, the
Anticybersquatting Consumer Protection Act and the Federal Trade Commission Act. Advertising and promotional information
presented to visitors on our online properties, our related social media channels and through our other marketing activities are
subject to federal and state consumer protection laws and regulations that govern unfair and deceptive practices. Many applicable
laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues of the Internet.
Moreover, the applicability and scope of the laws that do address the Internet remain uncertain. For example, the laws relating to
the liability of providers of online services are evolving. Claims have been either threatened or filed against us under both U.S. and
foreign laws for defamation, copyright infringement, patent infringement, privacy violations, cybersquatting, trademark
infringement and discrimination. In the future, claims may also be brought against us based on tort law liability and other theories
based on our content, products and services or content generated by our users.
We must also comply with certain foreign and U.S. laws and regulations that apply to our international operations. Our
business operations in countries outside the United States are subject to a number of U.S. federal laws and regulations, including
restrictions imposed by the FCPA and economic and trade sanctions administered by OFAC and the U.S. Commerce Department
based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals. The FCPA
is intended to prohibit bribery of foreign officials or parties and requires public companies in the United States to keep books and
records that accurately and fairly reflect those companies’ transactions. OFAC regulations prohibit U.S.-based entities from
entering into or facilitating transactions with, for the benefit of, or involving the property of, persons, governments or countries
designated by the U.S. government under one or more sanctions regimes, which could include transactions that provide a benefit
that is received in an OFAC designated country. Additionally, some of the products and services we provide to customers globally
may require approval under applicable U.S. export and customs law.
VAT, sales and use, and similar tax laws and rates vary greatly by jurisdiction. We do not collect such taxes in every
jurisdiction in which we have sales based on our belief that such taxes are not applicable. Certain jurisdictions in which we do not
collect VAT, sales and use, or similar taxes on our sales may assert that such taxes are applicable, which could result in tax
assessments, penalties and interest for prior periods for which it was not collected or accrued, and a requirement to collect such
taxes in the future. Such tax assessments, penalties and interest, or future requirements, including implementing products and
technologies to calculate, collect and remit such taxes, may materially and adversely affect our business, financial condition and
operating results.
The costs of compliance with these regulations may increase in the future as a result of changes in the regulations or the
interpretation of them. Further, if we fail to comply with applicable laws and regulations, we could be exposed to claims for
damages, financial penalties, reputational harm, incarceration of our employees or restrictions on our operations, which could
increase our costs of operations, reduce our profits or cause us to forgo opportunities that would otherwise support our growth.
Changes
in
state,
federal
or
international
taxation
laws
and
regulations
may
adversely
affect
our
business.
Due to the global nature of the Internet, it is possible that, although our services and the Internet transmissions related to
them typically originate in Nevada and California, governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and
local levels are also currently reviewing the appropriate treatment of companies engaged in Internet commerce. New or revised
international, federal, state or local tax regulations may subject us or our customers to additional sales, income, VAT and other
taxes. We cannot predict the effect of current attempts to impose sales, income, VAT or other taxes on commerce over the
Internet. New or revised taxes and, in particular, additional sales taxes or VAT, would likely increase the cost of doing business
online and decrease the attractiveness of advertising and selling goods and services over the Internet. New taxes could also create
significant increases in internal costs necessary to capture data and collect and remit taxes. Any of these events could have an
adverse effect on our business and results of operations.
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We
may
not
succeed
in
expanding
our
businesses
internationally,
which
may
limit
our
future
growth.
Additionally,
operating
internationally
exposes
us
to
certain
additional
risks
and
operating
costs,
including
the
impact
of
foreign
currency
fluctuations.
One potential area of growth for our business is international expansion. The artwork and designs sold through our
marketplaces are created by a global community of artists and sold to customers around the world, and we recently acquired a
London-based art fair business that currently holds fairs in the United Kingdom and Australia. We also own and operate eHow en
Español and eHow Brasil (Spanish and Portuguese language sites that target both the U.S. and the worldwide Spanish/Portuguesespeaking markets). We cannot be certain that we will be successful in marketing our products and services internationally or that
our products and services will gain market acceptance in new geographic markets. If we are unable to expand and market our
products and services internationally, it could have a negative effect on our future growth prospects.
There are also risks inherent in conducting business in international markets, including the need to localize our products and
services to foreign customers’ preferences and customs, difficulties in managing operations due to language barriers, distance,
staffing and cultural differences, application of foreign laws and regulations to us, tariffs and other trade barriers, fluctuations in
currency exchange rates, establishing management and financial systems and infrastructures, reduced protection for intellectual
property rights in some countries, changes in foreign political and economic conditions, and potentially adverse tax consequences.
In addition, although we currently present and settle all sales through our online marketplaces in U.S dollars, if foreign currencies
decline relative to the U.S. dollar, this may have the impact of making the pricing for the products available on our marketplaces
appear higher in the markets with the currency declines. For example, in June 2016, a referendum was passed in the United
Kingdom to leave the European Union, commonly referred to as “Brexit”. Following Brexit, the value of the British pound
declined, which we believe negatively impacted Society6's conversion rates in the United Kingdom due to the impact on product
pricing. Operating internationally, where we have limited experience, exposes us to additional risks and operating costs that may
outweigh the financial and other benefits of operating in such markets.
A
reclassification
by
tax
authorities
of
any
freelance
professionals
we
currently
or
have
previously
contracted
with
from
independent
contractors
to
employees
could
require
us
to
pay
retroactive
taxes
and
penalties
and
significantly
increase
our
cost
of
operations.
We previously contracted with freelance professionals to create the substantial majority of the content for our media
properties and we continue to contract with freelance professionals for various purposes, including to develop, create and edit
content, and otherwise contribute to the content creation process, for our media properties and the media properties we host for our
partners. Because we consider the freelance professionals who we contract with or have contracted with to be independent
contractors, as opposed to employees, we do not withhold federal or state income or other employment related taxes, make federal
or state unemployment tax or Federal Insurance Contributions Act payments, or provide workers’ compensation insurance with
respect to such freelance professionals. Our contracts with freelance professionals that are classified as independent contractors
obligate the freelance professionals to pay these taxes. The classification of freelance professionals as independent contractors
depends on the specific facts and circumstances of each relationship. In the event of a determination by federal or state taxing
authorities that any freelance professionals we engage or have engaged as independent contractors are employees, we may be
adversely affected and subject to retroactive taxes and penalties. In addition, if the freelance professionals we categorize as
independent contractors were deemed to be employees, our costs associated with content creation could increase significantly, we
could potentially incur fines, penalties or other damages, and our financial results would be adversely affected.
Risks Relating to Owning Our Common Stock
The
trading
price
of
our
common
stock
is
likely
to
be
volatile
and
an
active,
liquid
and
orderly
market
for
our
common
stock
may
not
be
sustained.
The trading price of our common stock has been, and is likely to be, highly volatile and could be subject to wide fluctuations
in response to various factors, some of which are beyond our control. For example, from the date of our initial public offering in
January 2011 through February 15, 2017, our closing stock price, as adjusted for the
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Table of Contents
Distribution and the 1-for-5 reverse stock split, has ranged from $4.05 to $48.75. In addition, we were recently selected to be part
of a two-year Tick Size Pilot Program approved by the SEC and implemented by the national securities exchanges and FINRA.
The Tick Size Pilot Program commenced in October 2016 and, pursuant to such program, our common stock is now quoted and
traded in $0.05 minimum increments. As a result, we have experienced lower average daily trading volume since the launch of the
program and could continue to experience such lower trading volume, which could also lead to greater volatility in the trading
price of our common stock or a less liquid market for our stock to trade. In addition, an active trading market for our common
stock may not be sustained, which could depress the market price of our common stock.
In addition to the factors discussed in this “Risk Factors” section and elsewhere in this report, factors that may cause the
trading price of our common stock to be volatile include:
·
our operating performance and the operating performance of similar companies;
·
the overall performance of the equity markets;
·
the number of shares of our common stock publicly owned and available for trading;
·
any major change in our board of directors or management;
·
publication of research reports about us or our industries or changes in recommendations or withdrawal of research
coverage by securities analysts;
·
publication of third party reports relating to the performance of our business or certain key operating metrics;
·
large volumes of sales of our shares of common stock by existing stockholders; and
·
general political and economic conditions, including any negative economic effects or instability resulting from the
transition to a new presidential administration in the United States, including changes in the political environment and
international relations as well as resulting regulatory or tax policy changes . In addition, the stock market in general, and the market for Internet-related companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies.
Securities class action litigation has often been instituted against companies following periods of volatility in the overall market
and in the market price of a company’s securities. This litigation, if instituted against us, could result in very substantial costs,
divert our management’s attention and resources and harm our business, financial condition and results of operation.
The
large
number
of
shares
of
our
common
stock
eligible
for
public
sale
could
depress
the
market
price
of
our
common
stock.
The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in
the market, and the perception that these sales could occur may also depress the market price of our common stock. As of
February 15, 2017, we had 19,865,638 shares of common stock outstanding (excluding shares held in treasury). As of February 15,
2017, we also had over ten million shares of common stock reserved for future issuance under our equity compensation plans, of
which approximately five million shares are registered under our registration statement on Form S-8 on file with the SEC. Subject
to the satisfaction of applicable exercise periods, vesting requirements and, in certain cases, performance conditions, the shares of
registered common stock issued upon exercise of outstanding options, vesting of future awards or pursuant to purchases under our
employee stock purchase plan (the “ESPP”) will be available for immediate resale in the open market. We also have previously,
and may from time to time in the future, issue shares of our common stock as consideration for acquisitions and investments. If
any such acquisition or investment is significant, the number of shares that we may issue may in turn be significant. In addition,
certain stockholders, including investors in our preferred stock that converted into common stock in connection with our initial
public offering, are eligible to resell shares of common stock under Rule 144 and Rule 701 without registering such
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Table of Contents
shares with the SEC. Sales of our common stock may make it more difficult for us to sell equity securities in the future at a time
and at a price that we deem appropriate. These sales could also cause our stock price to fall and make it more difficult for
shareholders to sell shares of our common stock.
Our
stock
repurchase
program
may
be
suspended
or
terminated
at
any
time,
which
may
result
in
a
decrease
in
the
trading
price
of
our
common
stock.
Our board of directors previously approved a stock repurchase program under which we are authorized to repurchase up to
$50.0 million of our common stock, of which approximately $14.4 million remained available as of December 31, 2016. Such
stock repurchases may be limited, suspended, or terminated at any time without prior notice. There can be no assurance that we
will repurchase additional shares of our common stock under our stock repurchase program or that any future repurchases will
have a positive impact on the trading price of our common stock or earnings per share. Important factors that could cause us to
limit, suspend or terminate our stock repurchase program include, among others, unfavorable market conditions, the trading price
of our common stock, the nature of other investment or strategic opportunities presented to us from time to time, the rate of
dilution of our equity compensation programs, the availability of adequate funds, and our ability to make appropriate, timely, and
beneficial decisions as to when, how, and whether to purchase shares under the stock repurchase program. If we limit, suspend or
terminate our stock repurchase program, our stock price may be negatively affected.
As
a
public
company,
we
are
subject
to
compliance
initiatives
that
require
substantial
time
from
our
management
and
result
in
significantly
increased
costs.
The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and other
rules implemented by the SEC and the NYSE, impose various requirements on public companies, including requirements related
to certain corporate governance practices. Compliance with these rules and regulations has resulted in significantly increased costs
for us as a public company than we incurred as a private company, including substantially higher costs to obtain comparable levels
of director and officer liability insurance. Proposed corporate governance laws and regulations under consideration may further
increase our compliance costs. If compliance with these various legal and regulatory requirements diverts our management’s
attention from other business concerns, it could have a material adverse effect on our business, financial condition and results of
operations. Additionally, these laws and regulations may make it more difficult for us to attract and retain qualified individuals to
serve on our board of directors, on committees of our board of directors, or as executive officers.
We are required to make an assessment of the effectiveness of our internal controls over financial reporting in accordance
with Section 404 of the Sarbanes-Oxley Act of 2002. We are also required to obtain an opinion on the effectiveness of our internal
controls over financial reporting from our independent registered public accounting firm. Section 404 requires us to perform
system and process evaluation and testing of our internal controls over financial reporting to allow management and our
independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting for
each fiscal year. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal
deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. If we are unable to comply
with the requirements of Section 404, management may not be able to assess whether our internal controls over financial reporting
are effective, which may subject us to adverse regulatory consequences and could result in a negative reaction in the financial
markets due to a loss of confidence in the reliability of our financial statements. In addition, if we fail to maintain effective
controls and procedures, we may be unable to provide the required financial information in a timely and reliable manner or
otherwise comply with the standards applicable to us as a public company. Any failure by us to provide the required financial
information in a timely and reliable manner could materially and adversely impact our financial condition and the trading price of
our securities. In addition, we may incur additional expenses and commitment of management’s time in connection with further
assessments of our compliance with the requirements of Section 404, which could materially increase our operating expenses and
adversely impact our results of operations.
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Table of Contents
If
securities
or
industry
analysts
publish
inaccurate
or
unfavorable
research
about
our
business,
our
stock
price
and
trading
volume
could
decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or
unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases to cover us
or fails to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading
volume to decline.
We
do
not
anticipate
paying
cash
dividends
and,
accordingly,
stockholders
must
rely
on
stock
appreciation
for
any
return
on
their
investment.
We have never declared or paid cash dividends on our common stock and we do not anticipate paying cash dividends in the
future. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return to
stockholders. Investors seeking cash dividends should not invest in our common stock.
Certain
provisions
in
our
charter
documents
and
Delaware
law
could
discourage
takeover
attempts
and
lead
to
management
entrenchment.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have
the effect of delaying or preventing changes in control or changes in our management without the consent of our board of
directors, including, among other things:
·
a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change
the membership of a majority of our board of directors;
·
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director
candidates;
·
the ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other
terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to
significantly dilute the ownership of a hostile acquiror;
·
the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of
directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies
on our board of directors;
·
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or
special meeting of our stockholders;
·
the requirement that a special meeting of stockholders may be called only by the chairman of our board of directors, the
Chief Executive Officer, the president (in absence of a Chief Executive Officer) or our board of directors, which may
delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of
directors;
·
the requirement for the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then outstanding
shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated
certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended
and restated bylaws, which may inhibit the ability of an acquiror from amending our certificate of incorporation or
bylaws to facilitate a hostile acquisition;
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Table of Contents
·
the ability of our board of directors, by majority vote, to amend the bylaws, which may allow our board of directors to
take additional actions to prevent a hostile acquisition and inhibit the ability of an acquiror from amending the bylaws to
facilitate a hostile acquisition; and
·
advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors
or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror
from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain
control of us.
We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in
general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock
for three years or, among other things, our board of directors has approved the transaction.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We do not own any real estate. We currently occupy approximately 52,000 square feet of office space in a Santa Monica,
California facility that serves as our corporate headquarters and houses nearly all of our personnel for both our Marketplaces and
Media service offerings. The lease for our Santa Monica facility expires in July 2024, subject to a one-time early termination right
allowing us to terminate the lease effective as of August 2019. We also occupy a small office in London, United Kingdom in
connection with the operations of The Other Art Fair, and we have arrangements for shared office space to supplement the needs
of our business in locations outside of our corporate headquarters . Our primary data center is located in Las Vegas, Nevada. We
believe that our current data centers and office facilities will be adequate for the foreseeable future.
Item 3. Legal Proceedings
From time to time, we are a party to various legal matters incidental to the conduct of our business. Certain of our
outstanding legal matters include speculative claims for indeterminate amounts of damages. We record a liability when we believe
that it is probable that a loss has been incurred and the amount can be reasonably estimated. Based on our current knowledge, we
do not believe that there is a reasonable possibility that the final outcome of the pending or threatened legal proceedings to which
we are a party, either individually or in the aggregate, will have a material adverse effect on our future financial results. However,
the outcome of such legal matters is subject to significant uncertainties.
Item 4. Mine Safety Disclosures
Not applicable.
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PART I I
I tem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common stock is listed and traded on the NYSE under the symbol “LFGR”. Prior to November 9, 2016, our common
stock was listed and traded on the NYSE under the symbol “DMD”. The following table sets forth, for the periods indicated and
on a per-share basis, the high and low daily closing sales prices of our common stock as reported by the NYSE.
Fiscal Year end December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year end December 31, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
High
5.50
6.26
5.91
7.00
$
$
$
$
High
$
$
$
$
6.14 6.78 6.35 6.14 $
$
$
$
Low
4.41
5.07
5.25
5.45
Low
4.05 5.10 4.08 4.15 Holders of Record
As of February 15, 2017, our common stock was held by 41 stockholders of record. A substantially greater number of
holders of our common stock are “street name” holders, or beneficial holders, whose shares are held of record by banks, brokers
and other financial institutions.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently do not anticipate paying any cash
dividends in the foreseeable future. Instead, we anticipate that all of our earnings will be used to provide working capital, to
support our operations and to finance the growth and development of our business. Any future determination to declare cash
dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations,
capital requirements, any applicable debt covenant requirements, general business conditions and other factors that our board of
directors may deem relevant.
Performance Graph
The following performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), or incorporated by reference into any filing of Leaf Group under the Securities Act of
1933, as amended (the “Securities Act”), except as shall be expressly set forth by specific reference in such filing.
The graph compares the cumulative total return of our common stock for the five-year period starting on December 31,
2011, and ending on December 31, 2016, with that of the S&P 500 Index and RDG Internet Composite Index over the same
period. The graph assumes that the value of the investment was $100 on December 31, 2011, and that all dividends and other
distributions were reinvested. Such returns are based on historical results and are not intended to suggest future performance.
33
Table of Contents
Unregistered Sales of Equity Securities and Use of Proceeds
We did not issue or sell any equity securities that were not registered under the Securities Act during the three months and
the year ended December 31, 2016.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes the stock repurchase activity for the three months ended December 31, 2016 and the
approximate dollar value of shares that may yet be purchased pursuant to our stock repurchase program.
In June 2016, we disclosed that our board of directors and management was considering re-initiating repurchases of up to
$5.0 million of our common stock under our stock repurchase plan through the end of 2016, and those repurchases were initiated
in July 2016. 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 .
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Table of Contents
October 1, 2016 - October 31, 2016
November 1, 2016 - November 30, 2016
December 1, 2016 - December 31, 2016
Total
Total Number of
Shares
Purchased
151,423
69,134
5,403
225,960
$
$
Average Price
Paid per Share
5.90
6.11
6.48
5.98
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)
151,423
69,134
5,403
225,960
$
$
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs (1)
14,847,000
14,425,000
14,389,000
14,389,000
(1) As disclosed in our current report on Form 8-K filed on August 22, 2011, our board of directors approved a stock repurchase program
authorizing us to repurchase up to $25.0 million of our outstanding common stock, effective as of August 19, 2011. Our board of
directors subsequently approved a $25.0 million increase to this stock repurchase program, for an aggregate authorized repurchase
amount of $50.0 million, as disclosed in a current report on Form 8-K filed on February 16, 2012. In total, as of December 31, 2016, we
had spent approximately $35.6 million of the authorized $50.0 million to repurchase shares of our common stock under the stock
repurchase program. Additionally, there were approximately 10,000 shares repurchased in the fourth quarter of 2016 that settled in the
first quarter of 2017. The stock repurchase program does not require us to purchase a specific number of shares, and the timing and
actual number of shares repurchased will depend on various factors including price, corporate and regulatory requirements, any
applicable debt covenant requirements, alternative investment opportunities and other market conditions. Stock repurchases may be
effected through negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule
10b5-1 of the Exchange Act. The stock repurchase program does not have an expiration date but may be suspended, modified or
discontinued at any time without prior notice .
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Table of Contents
Item 6. Select ed Financial Data
The consolidated statement of operations data for the years ended December 31, 2016, 2015 and 2014, as well as the
consolidated balance sheet data as of December 31, 2016 and 2015, are derived from our audited consolidated financial statements
that are included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for the years
ended December 31, 2013 and 2012, as well as the consolidated balance sheet data as of December 31, 2014, 2013 and 2012, are
derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. The historical results
presented below are not necessarily indicative of financial results to be achieved in future periods.
The following selected consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes
included elsewhere in this Annual Report on Form 10-K.
Consolidated Statement of Operations:
Total revenue
Operating expenses:
Service costs (exclusive of amortization of intangible assets)
Product costs
Sales and marketing
Product development
General and administrative
Goodwill impairment charge (2)
Amortization of intangible assets
Total operating expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss from continuing operations before income taxes
Income tax (expense) benefit (2)
Net loss from continuing operations
Net (loss) income from discontinued operations (3)
Net (loss) income
Earnings per share - basic and diluted
Net loss from continuing operations
Net (loss) income from discontinued operations
Net (loss) income per share - basic
Net (loss) income per share - diluted
Weighted average number of shares - basic (4)(5)
Weighted average number of shares - diluted (4)(5)
(1)
(2)
(1)
(1)
(1)
(1)
(1)
We completed one business acquisition during each of the years ended December 31, 2016, 2014 and 2012 and two business acquisitions during the
year ended December 31, 2013. Excluding the dispositions of non-core media properties, we completed one business disposition during each of the
years ended December 31, 2016 and 2015 and two business dispositions during the year ended December 31, 2014. During the year ended December 31, 2014, we recorded a pretax impairment charge of $232.3 million on the carrying value of our goodwill based on
the results of an interim assessment of impairment of the goodwill in our media reporting unit. This resulted in a reduction of tax amortization of
goodwill from the impairment of goodwill and the corresponding valuation allowance.
36
Year ended December 31,
2016
2015
2014
2013
2012
(In thousands, except per share data)
$ 113,452 $ 125,969 $ 172,429 $ 209,411 $ 207,640 25,434 37,481 43,553 51,274 54,304 42,081 33,769 26,058 9,882 — 26,654 21,041 20,624 36,275 38,948 19,964 26,315 37,674 32,185 31,190 30,704 35,428 41,086 53,014 54,082 — — 232,270 — — 10,900 18,706 38,316 36,519 32,402 155,737 172,740 439,581 219,149 210,926 (42,285) (46,771) (267,152) (9,738) (3,286) 96 361 328 5 31 (4) (143) (4,692) (1,642) (622) 654 13 (36) 40,172 3,107 (2,021)
(43,446)
(270,862)
(11,362)
(3,913)
10 (55) 14,713 (2,856) (951) (2,011) (43,501) (256,149) (14,218) (4,864) — — (11,208) (5,956) 11,040 (2,011)
(43,501)
(267,357) (20,174) 6,176 $ (0.10) $ (2.18) $ (13.66) $ (0.80) $ (0.28) (0.60) (0.34) 0.65 — — 0.37 $ (0.10) $ (2.18) $ (14.26) $ (1.14) $
0.35 $ (0.10) $ (2.18) $ (14.26) $ (1.14) $
20,152 19,938 18,745 17,707 16,910 20,152 19,938 18,745 17,707 17,447 Table of Contents
(3)
(4)
(5)
Discontinued operations for the periods presented relate to the reclassification of the Rightside operations to discontinued operations during 2014.
In June 2014, our stockholders approved a 1-for-5 reverse stock split of our outstanding common stock, which was effected in August 2014.
Accordingly, all share and per share amounts for all periods presented prior to the 1-for-5 reverse stock split have been adjusted retrospectively,
where applicable, to reflect this reverse stock split.
Basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average
number of common shares outstanding during the period. For the periods where we presented losses, all potentially dilutive common shares
comprised of stock options, restricted stock units and warrants are antidilutive. Restricted stock units are considered outstanding common shares and
included in the computation of basic earnings per share as of the date that all necessary conditions of vesting are satisfied. Restricted stock units are
excluded from the diluted earnings per share calculation when their impact is antidilutive. Prior to satisfaction of all conditions of vesting, unvested
restricted stock units are considered contingently issuable shares and are excluded from weighted average common shares outstanding.
Consolidated Balance Sheet Data:
Cash and cash equivalents and marketable securities
Working capital
Total assets
Long-term debt
Capital lease obligations, long-term
Total stockholders' equity
2016
2015
December 31,
2014
(In thousands)
$ 50,864 $ 38,570 $ 47,820
$ 46,204 $ 33,953 $ 37,215
$ 101,252 $ 101,459 $ 149,555
$
— $
— $
—
103 $
$
— $
—
$ 79,750 $ 79,120 $ 114,842
2013
2012
$ 153,511 $ 102,933
$ 91,048 $ 67,215
$ 777,088 $ 637,997
$ 96,250 $
—
61 $
793
$
$ 496,005 $ 472,191
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 net income (loss) from
discontinued operations, as well as net interest 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, acquisition, disposition and realignment costs and, in fiscal year 2014, goodwill impairment. 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 noncash charges can be useful because the amount 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,
37
Table of Contents
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):
Net (loss) income
Less: Net (loss) income from discontinued
operations, net of taxes
Net loss from continuing operations
Add (deduct):
Income tax (benefit) expense
Interest (income) expense, net
Other expense (income), net (1)
Depreciation and amortization (2)
Stock-based compensation (3)
Goodwill impairment charge
Acquisition, disposition and realignment costs (4)
Adjusted EBITDA
2016
$
$
(2,011) $
—
(2,011) (10) (92) (40,172) 18,090
7,779
—
1,396
(15,020)
$
Year ended December 31,
2015
2014
2013
(43,501) $ (267,357) $
—
(43,501) 55 (218) (3,107) 29,884
7,562
—
2,488
(6,837)
(11,208) (256,149)
(14,713) 4,364 (654) 50,567 18,866 232,270 2,905 37,456
$
$
(20,174) $
(5,956)
(14,218) 2,856 1,637 (13) 50,976
22,603
—
529
64,370
$
2012
6,176
11,040
(4,864)
951
591
36
47,420
27,189
—
110
71,433
(1) Primarily consists of income from the disposition of certain businesses, including Cracked for the year ended December 31, 2016, and other online
properties.
(2) Represents depreciation expense of our long-lived tangible assets and amortization expense of our finite-lived intangible assets, including
amortization expense related to our investment in media content assets, included in our GAAP results of operations. Amortization expense for the
years ended December 31, 2016, 2015, 2014, 2013 and 2012 includes $1.9 million, $3.4 million, $7.7 million, $3.1 million and $2.1 million,
respectively, of accelerated non-cash amortization expense associated with the removal of certain media content intangible assets from service during
those years.
(3) Represents the fair value of stock-based awards and certain warrants to purchase our stock included in our GAAP results of operations.
(4) Acquisition, disposition and realignment costs include such items, when applicable, as (a) legal, accounting and other professional service fees
directly attributable to acquisition, disposition or corporate realignment activities, (b) employee severance and other payments attributable to
acquisition, disposition or corporate realignment activities, and (c) expenditures related to the separation of Leaf Group into two distinct publicly
traded companies. Management does not consider these costs to be indicative of our core operating results.
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Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following
discussion
and
analysis
of
our
financial
condition
and
results
of
operations
should
be
read
in
conjunction
with
Part
II,
Item
6,
“Selected
Financial
Data”
and
our
consolidated
financial
statements
included
elsewhere
in
this
Annual
Report
on
Form
10-K.
In
addition
to
historical
data,
this
discussion
contains
forward-looking
statements
about
our
business,
operations
and
financial
performance
based
on
current
expectations
that
involve
risks,
uncertainties
and
assumptions.
Our
actual
results
may
differ
materially
from
those
discussed
in
the
forward-looking
statements
as
a
result
of
various
factors,
including
but
not
limited
to
those
discussed
in
“Special
Note
Regarding
Forward-Looking
Statements”
and
Item
I,
Part
1A,
“Risk
Factors”
included
elsewhere
in
this
Annual
Report
on
Form
10-K.
Overview
We are a diversified Internet company that builds platforms across our marketplaces and media properties to enable
communities of creators to reach passionate audiences in large and growing lifestyle categories. In addition, our diverse
advertising offerings help brands and advertisers find innovative ways to engage with their customers. Our business is comprised
of two service offerings: Marketplaces and Media.
Marketplaces
Through our Marketplaces service offering, we operate leading art and design marketplaces where large communities of
artists can market and sell their original artwork or their original designs printed on a wide variety of products. Society6.com
(“Society6”) provides artists with an online commerce platform to feature and sell their original designs on an array of consumer
products in the home décor, accessories, and apparel categories. SaatchiArt.com (“Saatchi Art”) is an online art gallery featuring a
wide selection of original paintings, drawings, sculptures and photography that provides a global community of artists with a
curated environment in which to exhibit and sell their work directly to consumers around the world. Our Marketplaces service
offering also includes The Other Art Fair, a leading London-based art fair for discovering emerging artists that complements our
Saatchi Art online marketplace.
Our Marketplaces service offering primarily generates revenue from the sale of products and services through our art and
design marketplaces. On Society6, revenue is generated from the sale of print-on-demand products. Saatchi Art primarily
generates revenue through commissions on the final sale price of original works of art. We also generate Marketplaces service
revenue from various sources relating to The Other Art Fair, including commissions from the sale of original art, fees paid by
artists for stands and sponsorship opportunities at the fairs. Our Marketplaces service offering is principally dependent on the
number of transactions and average revenue per transaction generated by products and services sold through our online
marketplaces. We believe there are opportunities to increase the number of transactions and the average revenue per transaction by
attracting new visitors to our online marketplaces via diverse online and offline marketing, improving conversion of visitors to
purchasing customers, continuing to introduce new products, international expansion and offering product bundling and other
promotions.
Media
Our Media service offering includes our leading owned and operated media properties that publish content, including
videos, articles and designed visual formats, on various category-specific properties with distinct editorial voices. Our media
properties include Livestrong.com, a health and healthy living destination; eHow, a do-it-yourself reference destination; and over
40 other media properties focused on specific categories or interests that we either own and operate or host and operate for our
partners. During the third quarter of 2016, we began launching several category-specific properties leveraging topics and content
from eHow because we feel that more narrowly focused media properties now resonate better with audiences. As we continue this
process of migrating categories of content onto new media properties, eHow.com will narrow its focus on informative and
entertaining projects for do-it-yourself enthusiasts. Our Media service offering also includes our content publishing studio, through
which we create content for third party publishers and brands.
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Table of Contents
Our Media service offering generates the majority of its revenue from the sale of advertising on our media properties. Our
advertising revenue is principally dependent on the number of visits to our properties and the corresponding ad unit rates. In the
past, we have experienced significant declines to the total number of visits to our properties, particularly eHow, due to algorithmic
changes implemented by Google, Bing, and Yahoo! and our ongoing strategy to remove low quality and duplicative content from
our properties. We have also experienced lower ad monetization due to industry declines in cost-per-click ad rates and our
decision to reduce the number of advertisements per page on certain articles. Visits across our media properties also continue to
shift from desktop to mobile, with ad unit rates for mobile generally lower than desktop, and our content is increasingly consumed
on social media platforms that do not monetize as well as desktop visits. In addition, ad unit rates on the new category-specific
properties using eHow content are currently lower than the rates on eHow.com because ad inventory on less established sites is
typically monetized at lower blended rates, in part because the smaller initial audience size makes it difficult to secure direct
branded ad sales for these properties. Future changes to search engine algorithms that negatively impact the volume of referral
traffic, declines in our ad unit rates, increased consumption of our content on mobile devices and social media platforms, or
increased availability of ad blocking software, particularly on mobile devices, could result in a material adverse effect to our
business and results of operations.
However, we believe that there are opportunities to increase the number of visits to our media properties from direct visits,
social media and search engine referrals by building high-quality products that provide a better user experience and lead to
increased engagement. For example, Livestrong.com has seen sustained growth in traffic over the last two years after experiencing
a decline in visits following algorithm changes in 2013. We have also seen promising increases in traffic when we moved
category-specific content from eHow.com to new vertically focused media properties, including Cuteness.com, Techwalla.com,
LEAF.tv and Sapling.com, and we will continue to consider migrating content to additional category-specific properties to most
effectively leverage our content library. In order to improve the quality of our products, we have redesigned our websites; refined
our content library; rationalized ad unit density; and developed a greater variety of content formats, particularly video content and
formats better suited for mobile devices and consumption on other platforms. We are also working with a network of contributors
and influencers to create more authoritative and engaging content and we are focused on building strong followings on various
social media platforms such as Facebook and Pinterest, where we also publish our content. Although these changes resulted in
certain increased operating expenses and lower revenue initially, 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. During the three months ended
December 31, 2016, we began to see the positive impact of these efforts as revenue per visit, or RPV, increased slightly as
compared to the three months ended September 30, 2016. Historically, the majority of our advertising revenue has been generated by our relationship with Google. While Google
continues to be our primary advertising vendor for advertising monetization, we have been significantly diversifying our
monetization partners since 2015 and expect to continue to do so in the future. Google also serves as one of our primary
technology platform partners in connection with our programmatic advertising sales offering. Any change in the type of services
that Google provides to us, or to the terms of our agreements with Google, could adversely impact our results of operations. Separation
On August 1, 2014, we completed the separation of Rightside from the Company, resulting in two independent, publicly
traded companies (the “Separation”). Following the Separation, Rightside operates our former domain name services business,
while we continue to own and operate our Marketplaces and Media businesses. The Separation was structured as a pro rata taxfree dividend involving the distribution of all outstanding shares of Rightside common stock to holders of our common stock as of
the August 1, 2014 record date (the “Distribution”). Immediately following the Distribution, we completed a 1-for-5 reverse stock
split of our outstanding and treasury shares of common stock. The financial results of Rightside are presented as discontinued
operations in our consolidated statements of operations for all periods prior to fiscal year 2015 in this Annual Report on Form 10K. Unless it is disclosed, all financial results represent continuing operations.
40
Table of Contents
Sale
of
Cracked
Business
In April 2016, we completed the sale of substantially all of the assets relating to our Cracked business, including the
Cracked.com humor website, to Scripps Media, Inc., a subsidiary of The E.W. Scripps Company, for a cash purchase price of
$39.0 million. A portion of the purchase price equal to $3.9 million was placed into escrow at closing to cover certain of our postclosing indemnification obligations. Any remaining portion of the escrow amount that is not subject to then-pending claims will be
paid to us in July 2017, on the 15-month anniversary of the closing date of the sale. Revenue for the Cracked business for the 2016
period through the sale date of April 12, 2016 was $1.8 million. The Cracked business had a pretax loss of $1.9 million for the
2016 period through the sale date of April 12, 2016, excluding allocations for corporate costs, but including stock-based
compensation expense resulting from the sale. Revenue for the Cracked business for the years ended December 31, 2015 and 2014
was $10.9 million and $9.2 million, respectively. The Cracked business had pretax income of $3.1 million and $3.3 million for the
years ended December 31, 2015 and 2014, respectively, excluding allocations for corporate costs.
Content
Studio
Realignment
In June 2016, we took certain actions to streamline our content publishing studio business (formerly known as studioD) and
better integrate the business into our broader Media service offering. As part of this realignment, we reduced the staffing within
this business by 35 full-time employees and integrated the remaining employees into our other Media businesses. Following this
realignment, we are continuing to create content for third party publishers and for brands using a more integrated approach.
We expect these actions to result in annualized savings of approximately $8.0 million.
Revenue
For the years ended December 31, 2016, 2015 and 2014, we reported revenue of $113.5 million, $126.0 million and $172.4
million, respectively. For the years ended December 31, 2016, 2015 and 2014, our Marketplaces revenue accounted for 58%, 41%
and 21% of our total revenue, respectively, and our Media revenue accounted for 42%, 59% and 79% of our total revenue,
respectively.
The revenue generated by our Marketplaces service offering has higher costs associated with it as compared to our Media
service offering due to variable product costs, including outsourced product manufacturing costs, artist royalties, marketing costs,
and shipping and handling costs. During the year ended December 31, 2016, a higher percentage of our total revenue was
generated by our Marketplaces service offering as compared to the prior year. If our revenue sources continue to shift from our
Media service offering to our Marketplaces service offering, our total costs relative to our revenue will be negatively impacted.
Key Business Metrics
We regularly review a number of business metrics, including the following key metrics, to evaluate our business, measure
the performance of our business model, identify trends impacting our business, determine resource allocations, formulate financial
projections and make strategic business decisions. Measures which we believe are the primary indicators of our performance are
described below. While we believe that the number of transactions, average revenue per transaction, number of visits and revenue
per visit are currently the key metrics for understanding our results of operations, in the third quarter of 2016 we also began
reporting video views for our media properties and social media followers for all properties as key metrics. We believe that video
views and social media followers have become key metrics because we believe that these are key areas of growth in digital media,
and that we can expand our audience and grow traffic by increasing our followers on social media platforms and creating highly
sharable content such as videos. Furthermore, as users increasingly consume content in video form or on social media platforms,
we believe that there will be increasing ability to monetize this content more effectively so it is important that we grow our
audiences in these channels. 41
Table of Contents
Marketplaces Metrics
·
Number of transactions: We define transactions as the total number of Society6 and Saatchi Art transactions successfully
completed online by a customer during the applicable period . ·
Average revenue per transaction: We calculate average revenue per transaction by dividing Marketplaces revenue for a
period (not including revenue generated by The Other Art Fair) by the number of transactions initiated in that period . Media Metrics
·
Visits: We define visits as the total number of times users access our content across (a) one of our owned and operated
media properties and/or (b) one of our partners’ media properties, to the extent that the visited partner web pages are
hosted by our content services. In each case, breaks of access of at least 30 minutes constitute a unique visit . ·
Revenue per visit (“RPV”): We define RPV as Media revenue per one thousand visits . Video Views: We define video views as the total number of views of all of our media videos on Facebook and YouTube,
or on Leaf Group sites or third party sites via YouTube or any other embedded video player, during the applicable period.
We include in this metric (i) views of videos published by any of our media properties, including Livestrong.com, eHow,
category-specific sites and international sites; and (ii) videos viewed on multiple YouTube channels affiliated with certain
of our properties.
·
Social Media Metrics
· Social Media Followers: We define social media followers as the sum of all Facebook, Pinterest, Instagram and Twitter
followers, as well as all YouTube subscribers, across our media or marketplaces properties, as applicable, as of the last
day of the relevant period. Social Media Followers includes subscribers for multiple YouTube channels affiliated with
certain Leaf Group properties. Individuals are counted more than once if they follow multiple properties or the same
property on multiple platforms, or if they subscribe to multiple YouTube channels.
The following table sets forth our key business metrics for the periods presented:
Marketplaces Metrics (1)(2) :
Number of Transactions
Average Revenue per Transaction
Media Metrics (1)(3) :
Visits (in thousands)
Revenue per Visit
Video Views (in thousands):
Social Metrics (in thousands):
Social Media Followers - Marketplaces:
Social Media Followers - Media:
2016
2015
2014
1,182,873 925,111 715,343 55.37 $
56.38 $
49.47 $
2,729,990 3,374,385 4,004,287 17.33 $
21.87 $
34.22 $
638,277 N/A (4) N/A (4) 2,057 N/A (5) N/A (5) 12,339 N/A (5) N/A (5) % Change 2016
28 % (2)% (19)% (21)% N/A (4) N/A (5) N/A (5) % Change 2015
29 % 14 % (16)% (36)% N/A (4) N/A (5) N/A (5) (1) For a discussion of these period-to-period changes in the number of transactions, average revenue per transaction, number of visits and RPV and how
they impacted our financial results, see “Results of Operations” below.
(2) Marketplaces Metrics do not include revenue or transactions related to The Other Art Fair business acquired in July 2016.
(3) Media Metrics include visits and revenue generated by Cracked.com and other non-core media properties prior to their respective disposition dates
and are not adjusted to be shown on a pro forma basis.
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Table of Contents
(4) Video Views for the years ended December 31, 2015 and 2014 are not available because we did not start formally tracking this metric for all media
properties until the third quarter of 2015.
(5) We did not track Social Media Followers across all platforms prior to the third quarter of 2016. As of December 31, 2015, our Marketplaces
properties had 0.8 million total Social Media Followers on Facebook and YouTube, respectively, and our Media properties had 10.3 million total
Social Media Followers on Facebook and YouTube, respectively. Social Media Followers was not tracked for the year ended December 31, 2014.
Basis of Presentation
Revenue
Our revenue is primarily derived from products and services sold through our art and design marketplaces and from sales of
advertising. Service Revenue
Marketplaces
We generate Marketplaces service revenue primarily from commissions we receive from facilitating the sale of original art
by artists to customers through Saatchi Art. We also generate Marketplaces service revenue from various sources relating to The
Other Art Fair, including commissions from the sale of original art and fees paid by artists for stands at the fairs. We recognize
service revenue arising from the sale of original art net of amounts paid to the artist because we are not the primary obligor in the
transaction, we do not have inventory risk, and we do not establish the prices for the art sold. We also recognize this service
revenue net of any sales allowances. Revenue is recognized after the original art has been delivered and the return period has
expired. Payments received in advance of delivery and completion of the return period are included in deferred revenue in the
accompanying consolidated balance sheets. We periodically provide incentive offers to Saatchi Art customers to encourage
purchases, including percentage discounts off current purchases, free shipping and other offers. Value-added taxes (“VAT”), sales
tax and other taxes are not included in Marketplaces service revenue because we are a pass-through conduit for collecting and
remitting any such taxes.
Media
We generate Media service revenue primarily from advertisements displayed on our online media properties and on certain
webpages of our partners’ media properties that are hosted by our content services. Articles, videos and other forms of content
generate advertising revenue from a diverse mix of advertising methods including performance-based cost-per-click advertising, in
which an advertiser pays only when a visitor clicks on an advertisement; display advertisements, where revenue is dependent upon
the number of advertising impressions delivered; native advertisements, which are advertisements created to match the form and
function of the platform on which they appear; sponsored content; or advertising links. At times, we enter into revenue-sharing
arrangements with our partners, and if we are considered the primary obligor, we report the underlying revenue on a gross basis in
our consolidated statements of operations and record the revenue-sharing payments to our partners in service costs.
We also generate Media service revenue from the sale or license of media content, including the creation and distribution of
content for third party brands and publishers through our content studio. Revenue from the sale or perpetual license of media
content is recognized when the content has been delivered and the contractual performance obligations have been fulfilled.
Revenue from the non-perpetual license of media content is recognized over the period of the license as content is delivered or
when other related performance criteria are fulfilled. In circumstances where we distribute our content on third party properties
and our partner acts as the primary obligor, we recognize revenue on a net basis. In addition, we previously provided social media
services and generated Media service revenue from recurring management support fees, overage fees in excess of standard usage
terms, outside consulting fees and initial set-up fees. As of February 2015, we no longer provide social media services.
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Product Revenue
We recognize product revenue from sales of Society6 products upon delivery, net of estimated returns and sales allowances
based on historical experience. We recognize product revenue from the sale of prints through Saatchi Art when the prints are
delivered and the return period has expired. Payments received in advance of delivery and, with respect to the Saatchi Art prints,
prior to completion of the return period are included in deferred revenue in the accompanying consolidated balance sheets. Product
revenue is recorded at the gross amount due to the following factors: we are the primary obligor in a transaction, we have
inventory and credit risk, and we have latitude in establishing prices and selecting suppliers. We periodically provide incentive
offers to customers to encourage purchases, including percentage discounts off current purchases, free shipping and other offers.
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 Costs
Service costs consist of payments relating to our Internet connection and co-location charges and other platform operating
expenses, including depreciation of the systems and hardware used to build and operate our content creation and distribution
platform; expenses related to creating, rewriting, or auditing certain content units; and personnel costs related to in-house editorial,
customer service and information technology. Service costs also include payments to our partners pursuant to revenue-sharing
arrangements where we are the primary obligor. In addition, service costs include expenses incurred in connection with art fairs
hosted by The Other Art Fair, such as venue-related costs and fair personnel costs. In the near term, we expect service costs to
decrease as a percentage of revenue due to revenue growth and lower information technology and content creation expenses.
Product Costs
Product costs consist of outsourced product manufacturing costs, artist royalties, personnel costs and credit card and other
transaction processing fees. In the near term, we expect our product costs to remain relatively flat as a percentage of product
revenue. Shipping and Handling
Shipping and handling 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 revenue primarily as a result of growth in our marketing activities across our
Marketplaces offerings, offset by lower sales and marketing expenses related to our Media service offerings as a result of the
realignment of our content studio. 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 decrease in the near term as a percentage of revenue due to revenue growth and lower
product development expenses as a result of the divestitures of our Cracked business and other non-core media properties, and the
realignment of our content studio.
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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. In the
first quarter of 2016, we reclassified certain personnel costs, including stock-based compensation, primarily relating to individuals
serving in management roles for specific businesses, from general and administrative expense to either service costs, sales and
marketing or product development, to better reflect the respective functions of these individuals. See Note 2 of Part IV, Item 15 of
this Annual Report on Form 10-K for additional information. We currently anticipate that general and administrative expenses will
decrease in the near term as a percentage of revenue due to revenue growth and flat general and administrative expenses.
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 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
decrease in the near term due to smaller acquisitions as compared to prior years. 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.
Goodwill
We test goodwill for impairment as of October 1st of each year unless there are interim indicators that suggest that it is more
likely than not that goodwill may be impaired. Goodwill is tested at the reporting unit level and as of December 31, 2016, we have
two reporting units: marketplaces and media. As of December 31, 2016, our goodwill balance related entirely to our marketplaces
reporting unit. We did not record any goodwill impairment charges for the year ended December 31, 2016. We may be required to
record impairment charges on our remaining goodwill in future periods.
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 of interest earned on cash balances and short-term investments. We typically invest our available
cash balances in money market funds and short-term United States Treasury obligations. Interest expense principally consisted of
interest on outstanding debt and amortization of debt issuance costs associated with our credit facility, which was fully repaid in
November 2014.
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.
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Provision for Income Taxes
Since our inception, we have been subject to income taxes principally in the United States, and certain other countries
where we have or had a legal presence, including the United Kingdom, the Netherlands, Australia, Canada and Argentina. We may
in the future become subject to taxation in additional countries based on the foreign statutory rates and our effective tax rate could
fluctuate accordingly.
Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
We currently believe that based on the available information, it is more likely than not that our deferred tax assets will not be
realized, and accordingly we have taken a full valuation allowance against all of our United States federal and state and certain
foreign deferred tax assets. Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax
credit carry-forwards in the event of an “ownership change,” as defined in Section 382 of the Code. Currently, we do not expect
the utilization of our net operating loss and tax credit carry-forwards in the near term to be materially affected as no significant
limitations are expected to be placed on these carry-forwards as a result of our previous ownership changes. However, if all or a
portion of our net operating loss carryforwards are subject to limitation because we experience an ownership change, our future
cash flows could be adversely impacted due to increased tax liability.
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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.
Revenue:
Service revenue
Product revenue
Total revenue
Operating expenses:
Service costs (exclusive of amortization of intangible assets shown
separately below) (1)(2)(3)
Product costs
Sales and marketing (1)(2)(3)
Product development (1)(2)(3)
General and administrative (1)(2)(3)
Goodwill impairment charge
Amortization of intangible assets
Total operating expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss from continuing operations before income taxes
Income tax benefit (expense) Net loss from continuing operations
Net loss from discontinued operations (1)(2)
Net loss
(1) Depreciation expense included in the above line items:
Service costs
Sales and marketing
Product development
General and administrative
Discontinued operations
Total depreciation
(2) Stock-based compensation included in the above line items (3) :
Service costs
Sales and marketing
Product development
General and administrative
Discontinued operations
Total stock-based compensation
(3)
$
$
$
$
$
$
2016
Year ended December 31,
2015
2014
52,889 $
77,254 $ 137,711
60,563 48,715 34,718
113,452 125,969 172,429
25,434 42,081 26,654 19,964 30,704 — 10,900 155,737 (42,285) 96 (4) 40,172 (2,021) 10 (2,011) — (2,011) 3,563 49 138 3,440 — 7,190 1,174 725 1,502 4,378 — 7,779 $
$
$
$
$
37,481 33,769 21,041 26,315 35,428 — 18,706 172,740 (46,771) 361 (143) 3,107 (43,446) (55) (43,501) — (43,501) 5,965 67 200 4,946 — 11,178 1,084 691 2,192 3,595 — 7,562 43,553
26,058
20,624
37,674
41,086
232,270
38,316
439,581
(267,152)
328
(4,692)
654
(270,862)
14,713
(256,149)
(11,208)
$ (267,357)
6,798
$
156
496
4,802
4,662
16,914
$
1,422
$
714
10,476
6,254
2,949
21,815
$
During the first quarter of 2016, we reclassified certain personnel costs (including stock-based compensation), primarily relating to
individuals serving in management roles for specific businesses, from general and administrative expense to either service costs, sales
and marketing or product development, to better reflect the respective functions of these individuals. Certain prior period amounts have
been reclassified to conform to the current period presentation, resulting in the following changes in our consolidated statements of
operations for the years ended December 31, 2015 and 2014, respectively: (i) decreases of $2.9 million and $9.1 million in general and
administrative expense; (ii) increases of $2.0 million and $8.3 million in product development expense; (iii) increases of $0.7 million
and $0.6 million in sales and marketing expense; and (iv) increases of $0.2 million and $0.2 million in service costs.
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As a percentage of revenue:
Revenue:
Service revenue
Product revenue
Total revenue
Operating expenses:
Service costs (exclusive of amortization of intangible assets shown
separately below)
Product costs
Sales and marketing
Product development
General and administrative
Goodwill impairment charge
Amortization of intangible assets
Total operating expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss from continuing operations before income taxes
Income tax (expense) benefit
Net loss from continuing operations
Net loss from discontinued operations
Net loss
2016
46.6 % 53.4 % 100.0 % 61.3 % 38.7 % 100.0 % 22.4 % 37.1 % 23.5 % 17.6 % 27.1 % — % 9.6 % 137.3 % (37.3)%
0.1 %
— %
35.4 % (1.8)%
— % (1.8)%
— %
(1.8)%
29.8 % 26.8 % 16.7 % 20.9 % 28.1 % — % 14.8 % 137.1 % (37.1)%
0.3 %
(0.1)%
2.4 % (34.5)%
— %
(34.5)%
— %
(34.5)%
79.9 % 20.1 % 100.0 % Year ended December 31,
2015
2014
25.3 % 15.1 % 12.0 % 21.8 % 23.8 % 134.7 % 22.2 % 254.9 % (154.9)%
0.2 %
(2.8)%
0.4 %
(157.1)%
8.5 %
(148.6)%
(6.5)%
(155.1)%
Revenue
Revenue by service offering was as follows (in thousands):
Marketplaces
Media
Total revenue
Year ended December 31,
2016
2015
2014
$ 66,139 $ 52,155 $ 35,391
47,313 73,814 137,038
$ 113,452 $ 125,969 $ 172,429
% Change % Change 2016 to 2015 2015 to 2014 27 %
(36)%
(10)%
47 % (46)% (27)% Marketplaces
Revenue
Marketplaces revenue increased by $14.0 million, or 27%, to $66.1 million for the year ended December 31, 2016, as
compared to $52.2 million for the year ended December 31, 2015. The number of transactions increased 28% to 1,182,873 in the
year ended December 31, 2016 from 925,111 in the prior year period, primarily due to increased traffic, new product introductions
and higher conversion rates. For the year ended December 31, 2016, Marketplaces average revenue per transaction was $55.37,
which excludes revenue generated through transactions consummated by The Other Art Fair, decreasing from $56.38 in the prior
year period due to increased promotional discounts.
Marketplaces revenue increased by $16.8 million, or 47%, to $52.2 million for the year ended December 31, 2015, as
compared to $35.4 million for the year ended December 31, 2014. The number of transactions increased 29% to 925,111 in the
year ended December 31, 2015 from 715,343 in the prior year period, driven primarily by new product introductions, higher
conversion rates, and increased traffic on Society6. For the year ended December 31, 2015, Marketplaces average revenue per
transaction was $56.38, increasing 14% from $49.47 in the prior year period due
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primarily to a shift towards higher priced items on Society6, as well as the addition of Saatchi Art in August 2014, which has
significantly higher average revenue per transaction.
Media
Revenue
Media revenue decreased by $26.5 million, or 36%, to $47.3 million for the year ended December 31, 2016, as compared to
$73.8 million for the year ended December 31, 2015. Visits decreased by 19% to 2,730 million visits in the year ended
December 31, 2016 from 3,374 million visits in the year ended December 31, 2015 primarily due to the divestitures of certain
media properties, including Cracked, as well as continued search and related traffic declines on eHow . RPV decreased by 21%, to
$17.33 in the year ended December 31, 2016 from $21.87 in the year ended December 31, 2015, as a result of lower ad
monetization yields primarily due to a shift to a higher mix of mobile traffic with lower RPV than desktop visits and our mid-year
strategic shift to launch several category-specific media properties leveraging topics and content from eHow.
Media revenue decreased by $63.2 million, or 46%, to $73.8 million for the year ended December 31, 2015, as compared to
$137.0 million for the year ended December 31, 2014. Visits decreased by 16% to 3,374 million visits in the year ended
December 31, 2015 from 4,004 million visits in the year ended December 31, 2014 driven by significant declines in desktop visits
across all of our media properties, in part due to management’s decision to remove over two million articles on eHow and
Livestrong.com. These declines were partially offset by mobile visit growth across most of our media properties. RPV decreased
by 36%, to $21.87 in the year ended December 31, 2015 from $34.22 in the year ended December 31, 2014, primarily due to lower
ad monetization yields and a shift to a higher mix of mobile traffic with lower RPV than desktop visits. In addition, the disposition
of our Pluck business in the first quarter of 2015 contributed approximately $8.2 million to the decrease in revenue.
Costs and Expenses
Operating costs and expenses were as follows (in thousands):
Service costs (exclusive of amortization of
intangible assets)
Product costs
Sales and marketing
Product development
General and administrative
Goodwill impairment charge
Amortization of intangible assets
$
2016
Year ended December 31,
2015
25,434
42,081
26,654
19,964
30,704
—
10,900
$
37,481
33,769
21,041
26,315
35,428
—
18,706
$
2014
43,553
26,058
20,624
37,674
41,086
232,270
38,316
% Change % Change 2016 2015 (32.0)%
25.0 %
27.0 %
(24.0)%
(13.0)%
— %
(42.0)%
(14.0)%
30.0 %
2.0 %
(30.0)%
(14.0)%
(100.0)%
(51.0)%
Service
Costs
Service costs for the year ended December 31, 2016 decreased by approximately $12.0 million, or 32%, to $25.4 million
compared to $37.5 million for the year ended December 31, 2015. The decrease in service costs was primarily due to decreases of
$4.1 million in personnel related costs, including stock-based compensation expense, $3.1 million related to lower content creation
and renovation expense, $2.4 million in depreciation expense, $2.0 million in information technology expense, $0.6 million in ad
serving costs, and $0.4 million in traffic acquisition costs. The decrease in personnel related costs was principally related to the
disposition of our Cracked business in April 2016. The decrease in information technology expense was primarily related to a
reduction in colocation costs as a result of eliminating one of our data centers. The decrease in content creation and renovation
expense was primarily related to lower content renovation expense on eHow and the disposition of our Cracked business in April
2016. These factors were partially offset by increases of $0.4 million in cost of services related to Saatchi Art and The Other Art
Fair and $0.2 million in consulting expense.
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Service costs for the year ended December 31, 2015 decreased by approximately $6.1 million, or 14%, to $37.5 million
compared to $43.6 million for the year ended December 31, 2014. The decrease in service costs was primarily due to decreases of
$2.1 million in information technology expense, $2.0 million in personnel related costs, including stock-based compensation
expense, $0.9 million in traffic acquisition costs, $0.8 million in depreciation expense, $0.6 million in ad serving costs, $0.6
million related to newly created content and content renovation, and $0.6 million in consulting expense. The decrease in
information technology expense was primarily related to the disposition of our Pluck business and a reduction in colocation,
bandwidth and other support costs. These factors were partially offset by a $1.5 million increase in cost of services related to
Saatchi Art.
Product
Costs
Product costs for the year ended December 31, 2016 increased by $8.3 million, or 25%, to $42.1 million compared to
product costs of $33.8 million for the year ended December 31, 2015, primarily due to increased costs related to the higher volume
of products sold on Society6. Product costs for the year ended December 31, 2015 increased by $7.7 million, or 30%, to $33.8 million compared to
product costs of $26.1 million for the year ended December 31, 2014, primarily due to increased costs related to the higher volume
of products sold on Society6.
Sales
and
Marketing
Sales and marketing expenses increased by $5.6 million, or 27%, to $26.7 million for the year ended December 31, 2016
from $21.0 million for the year ended December 31, 2015. This increase was driven by an increase of $5.2 million in marketing
expenses primarily relating to Society6 and Saatchi Art, as well as increases of $0.3 million in consulting expenses and $0.1
million in personnel related costs, including stock-based compensation expense. Sales and marketing expenses increased by $0.4 million, or 2%, to $21.0 million for the year ended December 31, 2015 from
$20.6 million for the year ended December 31, 2014. This increase was driven by a $2.4 million increase in marketing expenses
from Society6 and our content studio (formerly known as our studioD business), partially offset by decreases in personnel related
costs, including stock-based compensation expense, of $1.6 million and consulting expenses of $0.4 million.
Product
Development
Product development expenses decreased by $6.4 million, or 24%, to $20.0 million for the year ended December 31, 2016
compared to $26.3 million for the year ended December 31, 2015. The decrease was driven by $5.6 million in lower personnel
related costs, including stock-based compensation expense, primarily as a result of the reduction in staffing in connection with the
realignment of our content studio. This decrease in product development expenses also reflected decreases of $0.5 million in
consulting expense, $0.2 million in license and support costs, and $0.1 million in depreciation expense.
Product development expenses decreased by $11.4 million, or 30%, to $26.3 million for the year ended December 31, 2015
compared to $37.7 million for the year ended December 31, 2014. The decrease was driven by a $11.1 million reduction in
personnel related costs, including stock-based compensation expense, and a $0.3 million decrease in depreciation expense.
General
and
Administrative
General and administrative expenses decreased by $4.7 million, or 13%, to $30.7 million for the year ended
December 31, 2016 compared to $35.4 million for the year ended December 31, 2015. The decrease was primarily due to
decreases of $1.7 million in facilities costs, $1.5 million in depreciation, $1.1 million in legal and audit fees, and $0.7 million in
consulting expense, offset by an increase of $0.3 million in other miscellaneous expenses.
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General and administrative expenses decreased by $5.7 million, or 14%, to $35.4 million for the year ended
December 31, 2015 compared to $41.1 million for the year ended December 31, 2014. The decrease was primarily due to
decreases of $3.2 million in personnel and related costs, including stock-based compensation expense, $1.4 million in legal and
audit fees, $0.5 million in facilities costs, and $0.2 million in taxes and insurance costs.
Severance
Costs
During the year ended December 31, 2016, we recognized severance costs of $1.7 million in connection with targeted
headcount reductions, primarily as a result of actions taken in June 2016 to streamline our content publishing studio (formerly
known as our studioD business) and better integrate this business into our broader Media service offering. These severance costs
were recognized in the condensed consolidated statements of operations as follows: $0.7 million in sales and marketing costs, $0.6
million in product development costs, $0.3 million in service costs, and $0.1 million in general and administrative costs. Severance
amounts related to these actions were fully paid as of December 31, 2016. During the year ended December 31, 2015, we implemented a number of initiatives to improve operating efficiency,
including targeted reductions in force in areas where our business model shifted during the year. For the year ended December 31,
2015, we incurred $2.2 million in severance costs primarily related to certain workforce reduction actions that occurred during the
year. These severance costs were recognized in the consolidated statements of operations for the year ended December 31, 2015 as
follows: $1.1 million in product development costs, $0.6 million in service costs, $0.4 million in general and administrative costs,
and $0.1 million in sales and marketing costs. Severance costs include severance pay, the provision of certain extended employee
benefits, and employer taxes.
Amortization
of
Intangibles
Amortization expense for the year ended December 31, 2016 decreased by $7.8 million, or 42%, to $10.9 million compared
to $18.7 million for the year ended December 31, 2015. The decrease is primarily due to a decrease in amortization expense from
intangible assets completing their useful life and lower amortization expense from the removal of certain content units during the
year ended December 31, 2016.
Amortization expense for the year ended December 31, 2015 decreased by $19.6 million, or 51%, to $18.7 million compared
to $38.3 million for the year ended December 31, 2014. The decrease is primarily due to the removal of certain content units from
our media properties in the fourth quarter of 2014 and the disposition of certain intangible assets in connection with the sales of
our Pluck business in the first quarter of 2015 and our Creativebug and CoveritLive businesses in the third quarter of 2014, offset
by an increase in amortization expense from intangible assets acquired from the Saatchi Art acquisition in the third quarter of
2014. Goodwill
Impairment
Charge
We performed our annual impairment analysis in the fourth quarter of the years ended December 31, 2016 and 2015 and
based on the results of each annual impairment test there was no goodwill impairment charge for the years ended
December 31, 2016 or 2015. For the year ended December 31, 2014, due to unexpected revenue declines attributable to lower traffic and monetization
yields on certain of our media websites, we lowered our future cash flow expectations. As a result of the decline in our cash flow
forecast as well as a sustained decline in our market capitalization which remained at a level below the book value of our net assets
for an extended period of time, we performed an interim assessment of impairment of the goodwill in our media reporting unit in
the third quarter of 2014. Based on our analyses, we determined that the implied fair value of goodwill was substantially lower
than the carrying value of goodwill for the media reporting unit and that the implied fair value of the goodwill in the media
reporting unit was zero. Accordingly, we recorded a $232.3 million goodwill impairment charge in the year ended December 31,
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Interest
Income
(Expense),
Net
Net interest income was approximately $0.1 million for the year ended December 31, 2016, primarily related to interest paid
to us on our cash investments which are included in cash and cash equivalents.
Net interest income was approximately $0.2 million for the year ended December 31, 2015, primarily related to interest
income paid to us on the promissory note we received as part of the consideration for our sale of CoveritLive in July 2014. Net interest expense was $4.4 million for the year ended December 31, 2014, primarily reflecting interest paid under our
previous credit facility and a $1.7 million write-off of debt issuance costs associated with terminating our credit facility in
November 2014.
Other
Income
(Expense),
Net
Net other income for the year ended December 31, 2016 increased by $37.1 million to $40.2 million compared to $3.1
million for the year ended December 31, 2015, primarily due to the gain recognized on the sale of our Cracked business.
Net other income for the year ended December 31, 2015 increased by $2.4 million to $3.1 million compared to $0.7 million
for the year ended December 31, 2014, primarily due to the gain recognized on the sale of our Pluck business.
Income
Tax
Benefit
(Expense)
During the year ended December 31, 2016, we recorded an income tax benefit of less than $0.1 million compared to an
income tax expense of $0.1 million during the year ended December 31, 2015. Income tax benefit for the year ended December
31, 2016 is primarily due to the reversal of an uncertain tax position, offset by minimal state and foreign income tax expenses. During the year ended December 31, 2015, we recorded an income tax expense of $0.1 million compared to an income tax
benefit of $14.7 million during the year ended December 31, 2014. The change was primarily due to the tax effect arising from the
impairment of goodwill and its impact on our valuation allowance for the year ended December 31, 2014. Income tax expense for
the year ended December 31, 2015 is primarily related to minimal state and foreign income tax expenses. 52
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Selected Quarterly Financial Data
The following unaudited quarterly consolidated statements of operations for the quarters in the years ended
December 31, 2016 and 2015, have been prepared on a basis consistent with our audited consolidated annual financial statements,
and include, in the opinion of management, all normal recurring adjustments necessary for the fair statement of the financial
information contained in those statements. The period-to-period comparison of financial results is not necessarily indicative of
future results and should be read in conjunction with our consolidated annual financial statements and the related notes included
elsewhere in this Annual Report on Form 10-K.
Revenue:
Service revenue
Product revenue
Total revenue
Service costs (3)
Product costs
Loss from operations
Net (loss) income
Net (loss) income per
share (4) Basic
Diluted
Weighted average number
of shares
Basic
Diluted
March 31, 2015
June 30,
2015
$ 23,225 9,985 $ 33,210 $ 10,149 $ 6,834 $ (9,663) $ (6,749) $ 20,067 9,701 $ 29,768 $ 9,550 $ 6,768 $ (14,527) $ (14,408) $ (0.34) $
$ (0.34) $
Quarter ended
September
December
30,
31,
March 31, June 30,
2015 (1)
2015
2016
2016 (2)
(In thousands, except per share data)
Unaudited
$ 16,755 11,750 $ 28,505 $ 9,597 $ 7,638 $ (13,967) $ (13,805) (0.73) $
(0.73) $
$ 17,207 17,279 $ 34,486 $ 8,185 $ 12,529 $ (8,614) $ (8,539) (0.69) $
(0.69) $
(0.42) (0.42) $ 14,505 12,464 $ 26,969 $ 8,039 $ 8,507 $ (12,880) $ (11,909) $ 12,430 12,005 $ 24,435 $ 6,478 $ 8,290 $ (13,669) $ 24,467 $
$
$
$
(0.59) (0.59) September December
30,
31,
2016
2016
$ 12,688 15,371 $ 28,059 $ 5,370 $ 9,791 $ (8,383) $ (8,349) 1.20 $
1.18 $
(0.41) (0.41) $ 13,266 20,723 $ 33,989 $ 5,547 $ 15,493 $ (7,353) $ (6,220) $ (0.31) $ (0.31) 19,773 19,841 20,021 20,114 20,213 20,389 20,236 19,773 19,773 19,841 20,021 20,114 20,213 20,679 20,236 19,773 (1) During the quarter ended September 30, 2015, we identified through our internal processes that our property and equipment, net was overstated
because certain capitalized internally developed software costs had not been placed into service and certain write-offs were not identified on a timely
basis. As such, during the quarter ended September 30, 2015, we recorded an out of period adjustment which increased depreciation by $0.6 million
and decreased “Other income, net” by $0.5 million.
(2) During the quarter ended June 30, 2016, we completed the sale of our Cracked business. As a result of the sale, we recognized a gain of $38.1
million, recorded in other income in our consolidated statements of operations.
(3) Excludes the amortization of intangible assets.
(4) For a description of the method used to compute our basic and diluted net income (loss) per share, refer to Note 5 in Part II, Item 6, “Selected
Financial Data.”
Seasonality of Quarterly Results
Our Marketplaces service offering is affected by traditional retail seasonality and there is generally increased sales activity
on our marketplaces platforms during the fourth quarter holiday season. Both our Marketplaces and Media service offerings are
also affected by seasonal fluctuations in Internet usage, which generally slows during the summer months. These seasonal trends
have caused, and will likely continue to cause, fluctuations in our quarterly results.
Liquidity and Capital Resources
As of December 31, 2016, we had $50.9 million of cash and cash equivalents. In April 2016, we completed the sale of our
Cracked business for $39.0 million in cash. We received cash proceeds of $35.1 million on the closing date and the remaining $3.9
million was placed into escrow to cover certain of our post-closing indemnification obligations
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for a period of 15 months. Any remaining portion of the escrow amount that is not subject to then-pending claims will be released
to us in July 2017. During 2016, we also received approximately $1.7 million of cash from the sales of two of our non-core media
properties, with an additional $0.4 million expected to be received in the first quarter of 2017. In July 2016, we used
approximately $1.5 million of cash to fund the acquisition of The Other Art Fair.
Our principal sources of liquidity are our cash and cash equivalents, cash we generate from our operations and, in recent
periods, cash generated from the disposition of businesses and certain non-core media properties. Historically, we have principally
financed our operations from the issuance of stock, net cash provided by our operating activities and borrowings under our
previous credit facilities. In November 2014, we repaid all outstanding amounts under our previous credit facility and terminated
that facility, and 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. Our primary uses of cash include operating costs incurred to fund the day-to-day operations of our business. In addition,
since our inception, we have used significant amounts of cash to make strategic acquisitions to grow our business, including the
acquisitions of Society6 in June 2013, Saatchi Art in August 2014 and The Other Art Fair in July 2016. We have also generated
cash by disposing of certain businesses and online media properties. In addition to the dispositions discussed above, we sold (i)
our Pluck social media business in February 2015 for $3.8 million in cash after working capital adjustments; (ii) certain non-core
media properties during the year ended December 31, 2015 for a total of $1.2 million; and (iii) our Creativebug and CoveritLive
businesses in July 2014 for approximately $10.0 million and $10.1 million, respectively. 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. In June 2016, we
disclosed that the Company’s board of directors and management was considering re-initiating repurchases of up to $5.0 million of
our common stock through the end of 2016, and these repurchases were initiated in July 2016. 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 . Repurchases were made as open market purchases pursuant to a trading plan implemented pursuant to Rule 10b5-1
of the Exchange Act as well as through certain negotiated transactions. The stock repurchases were funded with available cash
balances. As of December 31, 2016, approximately $14.4 million remained available under the stock repurchase plan and there
were approximately 10,000 shares repurchased for an aggregate amount of $0.1 million that were initiated in the fourth quarter of
2016 but settled in the first quarter of 2017. 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. The timing and actual
number of additional shares to be repurchased will depend on various factors including price, corporate and regulatory
requirements, any applicable debt covenant requirements, alternative investment opportunities and other market conditions.
Our cash flows from operating activities are significantly affected by our cash-based investments in operations, including
working capital, and corporate infrastructure to support our ability to generate revenue and conduct operations. Cash used in
investing activities has historically been, and is expected to be, impacted by our ongoing investments in our platforms, product,
company infrastructure and equipment. The following table sets forth our major sources and (uses) of cash for each of the periods
presented (in thousands): Net cash (used in) provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
54
$
$
$
Year ended December,
2015 2016
2014
(13,093) $ (8,438) $ 34,661 30,907 $ 7,089 $ (14,921) (5,573) $ (7,886) $ (125,418) Table of Contents
Cash Flow from Operating Activities
Year
ended
December
31,
2016
Net cash used in operating activities for the year ended December 31, 2016 was $13.1 million, an increase of $4.7 million
compared to the year ended December 31, 2015. The increase in net cash used in operating activities is primarily due to lower noncash charges for depreciation and amortization offsetting operating losses as compared to the year ended December 31, 2015. Our
net loss during the period was $2.0 million, which included non-cash charges of $25.9 million related to depreciation, amortization
and stock-based compensation, partially offset by gains on disposals of $40.2 million, which is an investing activity and does not
contribute to operating cash flow. Cash flow from operating activities was also impacted by a decrease in our working capital,
including changes in accounts receivable, prepaid expenses and accounts payable of $4.3 million, offset in part by changes in
deferred revenue, accrued expenses and other long-term assets of $1.1 million. The changes in our accounts receivable, accounts
payable and accrued liabilities were primarily due to the timing of payments and collections, as well as increased costs related to
product revenue which has increased as a percentage of total revenue. The change in deferred revenue was primarily due to the
sale of certain non-core media properties and less activity related to our content publishing studio business.
Year
ended
December
31,
2015
Net cash used in operating activities for the year ended December 31, 2015 was $8.4 million, a decrease of $43.1 million
compared to the year ended December 31, 2014. Our net loss during the period was $43.5 million, which included non-cash
charges of $37.4 million related to depreciation, amortization and stock-based compensation, partially offset by gains on disposals
of $3.2 million. Cash flow from operating activities was also impacted by a decrease in our working capital, including changes in
accounts receivable, prepaid expenses and deferred revenue of $5.0 million, offset in part by changes in accounts payable, accrued
expenses and other long-term assets of $4.1 million. The decrease in our deferred revenue was primarily due to the sale of our
Pluck social media business and the sale of other non-core media properties during the period. The changes in our accounts
receivable and accounts payable were primarily due to the timing of payments and collections. Year
ended
December
31,
2014
Net cash provided by operating activities in the year ended December 31, 2014 was $34.7 million. Our net loss during the
period was $267.4 million, which included non-cash charges of $232.3 million for goodwill impairment and $82.9 million related
to depreciation, amortization, stock-based compensation and debt extinguishment, partially offset by deferred taxes, gain on
disposals of businesses and properties, gain on other assets, net and other totaling $22.6 million. Cash flow from operating
activities was also impacted by a decrease in our working capital, including changes in accounts receivable and deferred revenue
of $22.8 million, offset in part by changes in accounts payable, accrued expenses, deferred registration costs, other long-term
assets and deposits with registries of $13.3 million. The increase in our deferred revenue was primarily due to growth in our
former registrar service during the period. The decrease in accrued expenses is reflective of increases in amounts due to certain
vendors and our employees resulting from growth in our business, while the changes in our accounts receivable and accounts
payable were primarily due to the timing of payments and collections. Cash Flow from Investing Activities
Year
ended
December
31,
2016
Net cash provided by investing activities was $30.9 million for the year ended December 31, 2016. Cash provided by
investing activities for the year ended December 31, 2016 included $36.8 million total from the sales of our Cracked business and
certain non-core media properties and $0.1 million from restricted deposits. Cash used in investing activities for the year ended
December 31, 2016 related to investments of $4.6 million in property and equipment, primarily comprised of investments in
servers and IT equipment, fixtures and fittings, leasehold improvements and internally developed software, and $1.4 million of
cash consideration for the acquisition of The Other Art Fair, net of cash acquired.
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Year
ended
December
31,
2015
Net cash provided by investing activities was $7.1 million for the year ended December 31, 2015. Cash provided by
investing activities for the year ended December 31, 2015 included $5.1 million total from the sales of our Pluck business and
certain non-core media properties, $5.1 million from the early repayment of a promissory note to us, $1.0 million received from a
disposition holdback and $0.7 million from restricted deposits. Cash used in investing activities for the year ended December 31,
2015 related to investments of $4.7 million in property and equipment, primarily comprised of investments in servers and IT
equipment, fixtures and fittings, leasehold improvements and internally developed software, and investments of $0.1 million in
intangible assets, primarily comprised of media content.
Year
ended
December
31,
2014
Net cash used in investing activities was $14.9 million for the year ended December 31, 2014, and included investments of
$8.9 million in property and equipment, primarily comprised of servers and IT equipment, fixtures and fittings, leasehold
improvements and internally developed software, and investments of $5.7 million in intangible assets, primarily composed of
media content. Cash flows from investing activities for the year ended December 31, 2014 also included cash inflows of $13.7
million from the sales of businesses, including Creativebug and CoveritLive, as well as outflows of $2.2 million as partial
consideration to acquire Saatchi Art, and $3.1 million of restricted cash comprised of a $1.7 million holdback amount paid by us
as part of the Saatchi Art consideration and $1.4 million for a standby letter of credit we cash collateralized in connection with the
payment arrangement for our Santa Monica office lease. In connection with our former domain name business, we made net
payments for gTLD applications of $15.8 million and received cash proceeds of $6.1 million from the withdrawals of our interest
in certain gTLD applications during the year ended December 31, 2014.
Cash Flow from Financing Activities
Year
ended
December
31,
2016
Net cash used in financing activities was $5.6 million during the year ended December 31, 2016, primarily comprised of
$4.9 million used for repurchases of common stock and $1.2 million of costs related to taxes paid on vesting of restricted stock
units. We received proceeds of $0.6 million from the exercise of employee stock options and contributions from participants in our
Employee Stock Purchase Plan during the year ended December 31, 2016.
Year
ended
December
31,
2015
Net cash used in financing activities was $7.9 million during the year ended December 31, 2015, primarily comprised of
$7.6 million of cash paid for acquisition holdbacks from prior year acquisitions and $0.7 million of costs related to taxes paid on
vesting of restricted stock units. We received proceeds of $0.5 million from the exercise of employee stock options and
contributions from participants in our Employee Stock Purchase Plan during the year ended December 31, 2015.
Year
ended
December
31,
2014
Net cash used in financing activities was $125.4 million during the year ended December 31, 2014, primarily comprised of
$96.3 million used to repay all amounts outstanding under our previous credit facility and $24.1 million used to capitalize
Rightside in connection with the Separation. We also used $1.9 million during the year ended December 31, 2014 to fund
acquisition holdbacks related to our acquisitions of Name.com, Creativebug and Society6. During the year ended December 31,
2014, we also incurred $2.9 million of costs related to taxes paid on vesting of restricted stock units and we received proceeds of
$0.5 million from the exercise of employee stock options and contributions from participants in our Employee Stock Purchase
Plan. Off Balance Sheet Arrangements
As of December 31, 2016, we did not have any off balance sheet arrangements.
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Capital Expenditures
For the years ended December 31, 2016, 2015 and 2014, we used $4.6 million, $4.7 million and $8.9 million, respectively,
in cash to fund capital expenditures to create internally developed software, fund leasehold improvements and purchase servers, IT
equipment and fixtures and fittings. We currently anticipate making capital expenditures between $4.0 million and $6.0 million
during the year ending December 31, 2017. Contractual Obligations
The following table summarizes our outstanding contractual obligations as of December 31, 2016 (in thousands):
Operating lease obligations
Capital lease obligations
Total contractual obligations
$
$
Less than
1 year
2,108 71 2,179 $
$
1-3
years
4,984 106 5,090 $
$
3-5
years
27 — 27 More than
5 years
$
$
— — — $
$
Total
7,119 177 7,296 Included in operating lease obligations are agreements to lease our primary office space in Santa Monica, California and
other locations under various operating leases that have non-cancelable periods ending between February 2018 and February 2020.
At December 31, 2016, we had a cash collateralized standby letter of credit for approximately $1.1 million associated with
one of our leases.
Indemnifications
In the normal course of business, we have provided certain indemnities, commitments and guarantees under which we may
be required to make payments in relation to certain transactions or contractual commitments. These indemnities include
intellectual property indemnities to our customers and partners, indemnities to our directors and officers to the maximum extent
permitted under the laws of Delaware, indemnifications related to our lease agreements and indemnifications to sellers or buyers in
connection with acquisitions and dispositions, respectively. In addition, our advertiser, content creation and distribution partner
agreements contain certain indemnification provisions, which are generally consistent with those prevalent in our industry. We
have not incurred significant obligations under indemnification provisions historically, and do not expect to incur significant
obligations in the future. Accordingly, we have not recorded any liability for these indemnities.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles (“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 longlived assets including our media content, income taxes, stock-based compensation and discontinued operations have the greatest
potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and
estimates.
Please see Note 2 of Part IV, Item 15 of this Annual Report on Form 10-K for the summary of significant accounting
policies.
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Revenue Recognition
We recognize advertising revenue from a diverse mix of advertising methods including performance-based cost-per-click
advertising, in which an advertiser pays only when a visitor clicks on an advertisement; display advertisements, where revenue is
dependent upon the number of advertising impressions delivered; native advertisements, which are advertisements created to
match the form and function of the platform on which they appear; sponsored content; or advertising links . We may be required to
estimate the impressions or clicks delivered based on internal or third party data. Historical estimates have not been significantly
different than actual results.
We recognize product revenue based on actual or estimated delivery dates, net of estimated returns and sales allowances
based on historical experience. Saatchi Art service revenue is recognized when the original art has been delivered based on the
actual or estimated delivery date and the return period has expired. We periodically review these delivery estimates based on
historical experience and shipping carrier information and believe our estimates are reasonable, however, future changes in
delivery times may impact the timing of our revenue recognition. We estimate sales returns on a monthly basis based on historical
returns. Sales returns have not had a material impact on our results.
We recognize our revenue on a gross or net basis based on whether we consider ourselves to be the primary obligor in the
transaction, assume the inventory and credit risk and have the latitude in establishing prices and selecting suppliers. The
determination of these criteria is subjective in nature. Should the nature or substance of our revenue transactions change, the
revenue recognized in our financial statements may differ.
Accounts Receivable and Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables from our customers
based on our best estimate of the amount of probable losses from existing accounts receivable. We determine the allowance based
on an analysis of historical bad debts, customer concentrations, customer credit-worthiness and current economic trends. In
addition, past due balances over 60 days and specific other balances are reviewed individually for collectability on at least a
quarterly basis. Our allowance for doubtful accounts and bad debt expense have not been historically significant and we expect
that this trend will continue in the near term.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is
tested for impairment annually as of October 1st or when events or circumstances change in a manner that indicates goodwill
might be impaired. Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an
operating segment. We evaluate our reporting units when changes in our operating structure occur, and if necessary, reassign
goodwill using a relative fair value allocation approach. As of December 31, 2016, we have two reporting units, marketplaces and
media, and our goodwill balance related entirely to our marketplaces reporting unit. For the year ended December 31, 2016, we
elected to perform a step one impairment analysis as part of our annual goodwill impairment test and determined that there was no
impairment charge for the year ended December 31, 2016 . We may be required to record goodwill impairment charges in future
periods. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change
in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key
personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant
negative industry or economic trends, a decline in our stock price leading to an extended period when our market capitalization is
less than the book value of our net assets, or significant underperformance relative to expected historical or projected future results
of operations.
When testing goodwill for impairment, we first perform a qualitative assessment to determine whether it is necessary to
perform step one of a two-step goodwill impairment test for each reporting unit. We are required to perform step one only if we
conclude that it is more likely than not that a reporting unit’s fair value is less than the carrying value of its assets. Should this be
the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair
values of our reporting units with their respective carrying values, including
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goodwill. Significant estimates in valuing our reporting units include, but are not limited to, future expected cash flows, market
comparables and discount rates. If the estimated fair value of a reporting unit exceeds the carrying value, goodwill is not
considered to be impaired and no additional steps are necessary. If, however, the fair value of a reporting unit is less than its
carrying value, then a second step is performed to measure the amount of the impairment loss, if any. The amount of the
impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value
of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit, but may
require valuations of certain internally generated and unrecognized intangible assets such as our software, technology, patents and
trademarks.
Intangible Assets—Acquired in Business Combinations
We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business
combination and allocate the purchase price of each acquired business to our respective net tangible and intangible assets. We use
valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A
discounted cash flow analysis requires us to make various assumptions and estimates including projected revenue, operating costs,
growth rates, useful lives and discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but
which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Intangible assets are
amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic
benefits are consumed.
Discontinued Operations
We report the results of operations of a business as discontinued operations if the disposal of a component represents a
strategic shift that has (or will have) a major effect on our operations and financial results. The results of discontinued operations
are reported in discontinued operations in the consolidated statements of operations for current and prior periods commencing in
the period in which the business meets the criteria of a discontinued operation, and include any gain or loss recognized on closing
or adjustment of the carrying amount to fair value less cost to sell.
On August 1, 2014, we completed the Separation of Rightside, resulting in two independent, publicly traded companies.
Following the Separation, Rightside operates our former domain name services business, while we continue to own and operate
our Marketplaces and Media businesses. The financial results of Rightside are presented as discontinued operations in our
consolidated statements of operations for the year ended December 31, 2014 . We reclassified the following activity in our
consolidated statements of operations from continuing operations to discontinued operations (in thousands):
Year ended December 31,
2014
107,721 Service revenue
$
92,588 Service costs
5,632 Sales and marketing
8,203 Product and development
14,819 General and administrative
4,243 Amortization of intangible assets
125,485 Total operating expenses
(17,764) Operating loss
7,017 Other income (expense), net
(10,747) Loss before income taxes
$
(461) Income tax expense
(11,208) Net loss
$
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Income Taxes
We account for our income taxes using the liability and asset method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or in our
tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax
law or rates are considered. Deferred income taxes are recognized for differences between financial reporting and tax bases of
assets and liabilities at the enacted statutory tax rates in effect for the years in which the temporary differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment
date. We evaluate the realizability of our deferred tax assets, and valuation allowances are provided when necessary to reduce
deferred tax assets to the amounts expected to be realized.
We operate in various tax jurisdictions and are subject to audit by various tax authorities. We believe any adjustments that
may ultimately be required as a result of any of these audits will not be material to our consolidated financial statements.
We recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the
consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon settlement. We recognize interest and penalties accrued related to unrecognized tax benefits in
our income tax (benefit) provision in the accompanying consolidated statements of operations. Our evaluations of uncertain tax
positions are based upon their technical merits, and relevant tax law and the specific facts and circumstances as of each reporting
period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual
results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the
potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances
existing at that time. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the
period in which the determination is made.
Stock-based Compensation
We measure and recognize compensation expense for all stock-based payment awards made to employees, non-employees
and directors based on the grant date fair values of the awards. For stock option awards to employees with service based vesting
conditions, the fair value is estimated using the Black-Scholes-Merton option pricing model.
The Black-Scholes-Merton option pricing model requires management to make assumptions and to apply judgment in
determining the fair value of our awards. The most significant assumptions and judgments include the expected volatility,
expected term of the award and estimated forfeiture rates.
We estimated the expected volatility of our awards from the historical volatility of selected public companies within the
Internet and media industry with comparable characteristics to Leaf Group, including similarity in size, lines of business, market
capitalization, revenue and financial leverage. We calculated the weighted average expected life of our options based upon our
historical experience of option exercises combined with estimates of the post-vesting holding period. The-risk free interest rate is
based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the
option. The expected dividend rate is zero as we currently have no history or expectation of paying cash dividends on our common
stock. The forfeiture rate is established based on applicable historical forfeiture patterns adjusted for any expected changes in
future periods.
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Recent Accounting Pronouncements
See Note 2 of our Notes to Consolidated Financial Statements included in Part IV, Item 15, “Exhibits, Financial Statement
Schedules” of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign
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 collecting in advance when possible and 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, are readily convertible into cash and that 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 December 31, 2016, our cash and cash equivalents were maintained primarily with three 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.
Advertising network partners that accounted for more than 10% of our consolidated accounts receivable balance were as
follows:
Google Inc.
Year ended December 31,
2016
2015
35 % 26 % Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data required by Item 8 are contained in Item 7 and Item 15 of this
Annual Report on Form 10-K and are incorporated herein by reference.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Definition
and
Limitations
of
Disclosure
Controls
and
Procedures.
Our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) are designed to
reasonably ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is
(i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and
(ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well designed and operated,
can provide only reasonable assurance that it will detect or uncover failures within the Company to disclose material information
otherwise required to be set forth in our periodic reports. Inherent limitations to any system of disclosure controls and procedures
include, but are not limited to, the possibility of human error and the circumvention or overriding of such controls by one or more
persons. In addition, we have designed our system of controls based on certain assumptions, which we believe are reasonable,
about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible
future events.
Evaluation
of
Disclosure
Controls
and
Procedures.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures at December 31, 2016, the end of the period covered by this report. Based
on this evaluation, the principal executive officer and principal financial officer concluded that, at December 31, 2016, our
disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized, and reported on a
timely basis, and (ii) accumulated and communicated to management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s
Report
on
Internal
Control
Over
Financial
Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of the Company’s management,
including our Chief Executive Officer and our Chief Financial Officer, the Company conducted an evaluation of the effectiveness
of its internal control over financial reporting based upon the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that evaluation, management
concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in this
Annual Report on Form 10-K.
Changes
in
Internal
Control
over
Financial
Reporting.
There have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
62
Table of Contents
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this item will be set forth in our definitive proxy statement with respect to our 2017 annual
meeting of stockholders (the “2017 Proxy Statement”) to be filed with the SEC, which is expected to be filed not later than
120 days after the end of our fiscal year ended December 31, 2016, and is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees,
including our principal executive officer and principal financial officer. The Code of Business Conduct and Ethics is posted on our
website at http://ir.leafgroup.com.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a
provision of this Code of Business Conduct and Ethics by posting such information on our corporate website, at the address and
location specified above and, to the extent required by the listing standards of the New York Stock Exchange, by filing a Current
Report on Form 8-K with the SEC, disclosing such information.
Item 11. Executive Compensation
The information required by this item will be set forth in the 2017 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be set forth in the 2017 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be set forth in the 2017 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item will be set forth in the 2017 Proxy Statement and is incorporated herein by reference.
63
Table of Contents
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Annual Report on Form 10-K:
(a) Financial Statements:
The following consolidated financial statements are included in this Annual Report on Form 10-K on the pages indicated:
Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Loss Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
(b) Exhibits:
See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this Annual Report
on Form 10-K, which Exhibit Index is incorporated herein by reference . (c) Financial Statement Schedule:
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or
notes thereto.
Item 16. Form 10-K Summary
None.
64
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LEAF GROUP LTD.
/s/ SEAN MORIARTY
By:
SEAN MORIARTY
Chief
Executive
Officer
Date: February 23, 2017 POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Sean Moriarty, Rachel Glaser and
Daniel Weinrot, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his
or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf
of each person, individually and in each capacity stated below, solely for the purposes of filing any and all amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them
or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
65
Table of Contents
Name
/ S / SEAN MORIARTY
Sean Moriarty
/ S / RACHEL GLASER
Rachel Glaser
/ S / WENDY VOONG
Wendy Voong
/ S / JAMES QUANDT
James Quandt
/ S / FREDRIC W. HARMAN
Fredric W. Harman
/ S / JOHN A. HAWKINS
John A. Hawkins
/ S / VICTOR E. PARKER
Victor E. Parker
/ S / JOHN PLEASANTS
John Pleasants
/ S / BRIAN REGAN
Brian Regan
/ S / JENNIFER SCHULZ
Jennifer Schulz
/ S / MITCHELL STERN
Mitchell Stern
Title
Chief Executive Officer and Director
( Principal
Executive
Officer
)
Chief Financial Officer
( Principal
Financial
Officer)
Chief Accounting Officer
( Principal
Accounting
Officer)
Chairman of the Board
Director
Director
Director
Director
Director
Director
Director
66
Date
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Leaf Group Ltd. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Loss Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-1
Page
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Leaf Group Ltd.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations,
comprehensive loss, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Leaf
Group Ltd. and its subsidiaries (the “Company”) at December 31, 2016 and December 31, 2015, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control
Integrated
Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for these financial statements, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report
on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial
statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of
the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 23, 2017
F-2
Table of Contents
Leaf Group Ltd. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
Assets
Current assets
50,864 Cash and cash equivalents
$
6,849 Accounts receivable, net
8,139 Prepaid expenses and other current assets
65,852 Total current assets
11,503 Property and equipment, net
11,273 Intangible assets, net
11,167 Goodwill
1,457 Other assets
101,252
$
Total assets
Liabilities and Stockholders' Equity
Current liabilities
2,451 Accounts payable
$
15,017 Accrued expenses and other current liabilities
2,180 Deferred revenue
19,648 Total current liabilities
108 Deferred tax liability
1,746 Other liabilities
Total liabilities
21,502 Commitments and contingencies (Note 9)
Stockholders’ equity
Common stock, $0.0001 par value. Authorized 100,000 shares; 21,407 issued and 19,763
shares outstanding at December 31, 2016 and 20,956 issued and 20,154 shares outstanding
2 at December 31, 2015
Additional paid-in capital
513,139 Treasury stock at cost, 1,644 at December 31, 2016 and 802 at December 31, 2015
(35,641) (112) Accumulated other comprehensive loss
Accumulated deficit
(397,638) 79,750 Total stockholders’ equity
Total liabilities and stockholders’ equity
$ 101,252 The accompanying notes are an integral part of these consolidated financial statements.
F-3
December 31, December 31,
2016
2015
$
$
$
38,570 10,469 4,989 54,028 14,568 21,332 10,358 1,173 101,459 1,973 15,169 2,933 20,075 551 1,713 22,339 2 505,603 (30,767) (91) (395,627) 79,120 $ 101,459 Table of Contents
Leaf Group Ltd. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Revenue:
Service revenue
Product revenue
Total revenue
Operating expenses:
Service costs (exclusive of amortization of intangible assets shown
separately below)
Product costs
Sales and marketing
Product development
General and administrative
Goodwill impairment charge
Amortization of intangible assets
Total operating expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss before income taxes
Income tax benefit (expense) Net loss from continuing operations
Net loss from discontinued operations
Net loss
Net loss per share
Net loss from continuing operations
Net loss from discontinued operations
Net loss per share - basic and diluted
Weighted average number of shares - basic and diluted
Year ended December 31,
2016
2015
52,889 $
77,254 $
$
60,563 48,715 113,452 125,969 25,434 42,081 26,654 19,964 30,704 — 10,900 155,737 (42,285) 96 (4) 40,172 (2,021) 10 (2,011) — (2,011) $
$
(0.10) $
$
— (0.10) $
$
20,152 37,481 33,769 21,041 26,315 35,428 — 18,706 172,740 (46,771) 361 (143) 3,107 (43,446) (55) (43,501) — (43,501) $
(2.18) $
— (2.18) $
19,938 The accompanying notes are an integral part of these consolidated financial statements.
F-4
2014
137,711 34,718 172,429 43,553 26,058 20,624 37,674 41,086 232,270 38,316 439,581 (267,152) 328 (4,692) 654 (270,862) 14,713 (256,149) (11,208) (267,357) (13.66) (0.60) (14.26) 18,745 Table of Contents
Leaf Group Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Loss
(In thousands)
Net loss
Other comprehensive loss, net of tax:
Change in foreign currency translation adjustment
Realized gain on marketable securities available-for-sale, net of tax
expense of $344
Other comprehensive loss, net of tax:
Comprehensive loss
Year ended December 31,
2016
2015
2014
$
(2,011) $ (43,501) $ (267,357) (21) (15) (13) $
— (21) (2,032) $
(565) — (15) (578) (43,516) $ (267,935) The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
Leaf Group Ltd. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In thousands)
Balance at December 31, 2013
Issuance of stock under employee
stock awards and other, net
Tax withholdings related to vesting of
share-based payments
Stock-based compensation expense Issuance of common stock for
acquisitions
Spin-off of Rightside Group, Ltd.
Reverse stock split
Realized gain on marketable
securities
Foreign currency translation
adjustment
Net loss
Balance at December 31, 2014
Issuance of stock under employee
stock awards and other, net
Issuance of stock for acquisition
holdback
Tax withholdings related to vesting of
share-based payments
Stock-based compensation expense Foreign currency translation
adjustment
Net loss
Balance at December 31, 2015
Issuance of stock under employee
stock awards and other
Repurchases of common stock to be
held in treasury
Tax withholdings related to vesting of
share-based payments
Stock-based compensation expense Foreign currency translation
adjustment
Net income
Balance at December 31, 2016
Common stock
Shares
Amount
Additional
paid-in
capital
amount
18,142 $
11 $
549 — Treasury
Stock
Accumulated other
comprehensive income
Accumulated
(loss)
deficit
611,028 $ (30,767) $
344 Total
stockholders’
equity
502 $
(84,769) $
496,005 — — 344 — — — — — — — 10,258 — — (144,032) (9) 9 — — — — — — 10,258 — — (144,032) — — — — — (565) — — 19,741 $
— — 2 $
290 — — — — — 1,050 — — (2,629) 22,831 — — — — — — — — — (668) 7,998 — — — — 20,154 $
— — 2 $
453 — (844) — — — (4,874) — — — — (1,246) 8,202 — — — — 19,763 $
— — 2 $
— 464 — — — — — — — (668) 7,998 (15) — — (43,501) (91) $ (395,627) $
(15) (43,501) 79,120 — — — — 513,139 $ (35,641) $
F-6
(565) — — — — — 505,603 $ (30,767) $
580 — (2,629) 22,831 (13) (13) — — (267,357) (267,357) (76) $ (352,126) $ 114,842 — — — — 497,809 $ (30,767) $
464 123 580 — — — — (4,874) — — — — (1,246) 8,202 (21) — (2,011) — (112) $ (397,638) $
(21) (2,011) 79,750 The accompanying notes are an integral part of these consolidated financial statements.
Table of Contents
Leaf Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
Deferred income taxes
Stock-based compensation
Goodwill impairment charge
Gain on disposal of businesses and online properties
Gain on other assets, net
Extinguishment of debt
Other
Change in operating assets and liabilities, net of effect of acquisitions and disposals:
Accounts receivable, net
Prepaid expenses and other current assets
Deferred registration costs
Deposits with registries
Other long-term assets
Accounts payable
Accrued expenses and other liabilities
Deferred revenue
Net cash (used in) provided by operating activities
Cash flows from investing activities
Purchases of property and equipment
Purchases of intangible assets
Payments for gTLD applications
Proceeds from gTLD withdrawals, net
Cash received from disposal of businesses and online properties, net of cash disposed
Cash received from early repayment of promissory note
Cash received from disposition holdback
Cash paid for acquisitions, net of cash acquired
Restricted deposits
Other
Net cash provided by (used in) investing activities
Cash flows from financing activities
Long-term debt repayments
Proceeds from exercises of stock options and purchases under ESPP
Repurchases of common stock
Taxes paid on net share settlements of restricted stock units
Cash paid for acquisition holdback
Cash distribution related to spin-off
Other
Net cash used in financing activities
Effect of foreign currency on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flows
Cash paid for interest
Cash paid for taxes
Stock issued for acquisitions
Holdback liability related to acquisitions
Note receivable related to disposal of a business
$
$
$
$
$
$
$
(2,011) 18,090 (45) 7,779 — (40,230) — — 111 3,502 238 — — (371) 529 (166) (519) (13,093) (4,582) (147) — — 36,815 — — (1,413) 136 98 30,907 — 579 (4,874) (1,246) — — (32) (5,573) 53 12,294 38,570 50,864 4 99 — — — $ (43,501) 29,884 — 7,562 — (3,156) — — (105) 3,840 917 — — (131) (2,794) (1,177) 223 (8,438) (4,732) (87) — — 5,071 5,100 998 (58) 671 126 7,089 — 464 — (668) (7,561) — (121) (7,886) (15) (9,250) 47,820 $ 38,570 143 $
116 $
731 $
$
— $
— The accompanying notes are an integral part of these consolidated financial statements.
F-7
Year ended December 31,
2016
2015
2014
$ (267,357) 59,473 (14,409) 21,815 232,270 (795) (5,745) 1,656 (1,650) 10,844 (145) (8,876) (259) (585) (2,192) (1,341) 11,957 34,661 (8,918) (5,688) (15,829) 6,105 13,696 — — (2,240) (3,064) 1,017 (14,921) (96,250) 478 — (2,902) (1,945) (24,145) (654) (125,418) (13) (105,691) 153,511 $ 47,820 2,296 $
104 $
$ 10,258 1,700 $
4,946 $
Table of Contents
Leaf Group Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
1. Company Background and Overview
Leaf Group Ltd. (“Leaf Group” and, together with its consolidated subsidiaries, the “Company,” “our,” “we,” or “us”) is a
Delaware corporation headquartered in Santa Monica, California. We are a diversified Internet company that builds platforms
across our marketplaces and media properties to enable communities of creators to reach passionate audiences in large and
growing lifestyle categories. Our business is comprised of two service offerings: Marketplaces and Media.
On November 9, 2016, our corporate name changed from Demand Media, Inc. to Leaf Group Ltd. as part of our evolution
from a pure digital media company to a diversified internet marketplaces and media company. We also commenced trading under
the ticker symbol “LFGR” on the New York Stock Exchange as of market open on November 9, 2016.
On August 1, 2014, we completed the separation of Rightside Group, Ltd. (“Rightside”) from the Company, resulting in two
independent, publicly traded companies (hereinafter referred to as the “Separation”). Following the Separation, Rightside operates
the domain name services business, while we continue to own and operate our Marketplaces and Media businesses. The
Separation was structured as a pro rata tax-free dividend involving the distribution of all outstanding shares of Rightside common
stock to holders of our common stock as of the August 1, 2014 record date (the “Distribution”). Immediately following the
Distribution, we completed a 1-for-5, reverse stock split with respect to all of our outstanding and treasury shares of common
stock, which is reflected retrospectively throughout the consolidated financial statements.
Marketplaces
Through our Marketplaces service offering, we operate leading art and design marketplaces where large communities of
artists can market and sell their original artwork or their original designs printed on a wide variety of products. Society6.com
(“Society6”) provides artists with an online commerce platform to feature and sell their original designs on an array of consumer
products in the home décor, accessories, and apparel categories. SaatchiArt.com (“Saatchi Art”) is an online art gallery featuring a
wide selection of original paintings, drawings, sculptures and photography that provides a global community of artists with a
curated environment in which to exhibit and sell their work directly to consumers around the world. Our Marketplaces service
offering also includes The Other Art Fair, a leading London-based art fair for discovering emerging artists that complements our
Saatchi Art online business.
Media
Our Media service offering includes our leading owned and operated media properties that publish content, including
videos, articles, and designed visual formats, on various category-specific properties with distinct editorial voices. Our media
properties include Livestrong.com, a health and healthy living destination; eHow, a do-it-yourself reference destination; and over
40 other media properties focused on specific categories or interests that we either own and operate or host and operate for our
partners. During the third quarter of 2016, we began launching several category-specific properties leveraging topics and content
from eHow. As we continue this process of migrating categories of content onto new media properties, eHow.com will narrow its
focus on informative and entertaining projects for do-it-yourself enthusiasts. Our Media service offering also includes our content
publishing studio, through which we create content for third party publishers and brands.
2. Basis of Presentations and Summary of Significant Accounting Policies
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated
financial statements follows.
F-8
Table of Contents
Basis of Presentation
Our common stock share information and related per share amounts included in the consolidated financial statements have
been adjusted retroactively for all periods presented to reflect the 1-for-5 reverse stock split of our common stock that was
effected on August 1, 2014.
The financial results of Rightside are presented as discontinued operations in our accompanying consolidated statements of
operations for the year ended December 31, 2014. Our statements of cash flows are presented on a combined basis, including
continuing and discontinued operations. Unless it is otherwise disclosed, all other disclosures in our consolidated financial
statements are related to our continuing operations.
During the first quarter of 2016, we reclassified certain personnel costs (including stock-based compensation), primarily
relating to individuals serving in management roles for specific businesses, from general and administrative expense to
either service costs, sales and marketing or product development, to better reflect the respective functions of these
individuals. Certain prior period amounts have been reclassified to conform to the current period presentation, resulting in the
following changes in our consolidated statements of operations for the years ended December 31, 2015 and 2014, respectively: (i)
decreases of $2.9 million and $9.1 million in general and administrative expense; (ii) increases of $2.0 million and $8.3 million in
product development expense; (iii) increases of $0.7 million and $0.6 million in sales and marketing expense; and (iv) increases of
$0.2 million and $0.2 million in service costs.
Principles of Consolidation
The consolidated financial statements include the accounts of Leaf Group and its wholly owned subsidiaries. Acquisitions
are included in our consolidated financial statements from the date of the acquisition. Our purchase accounting resulted in all
assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All significant
intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles
(“GAAP”) in the United States requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue,
allowance for doubtful accounts, the assigned value of acquired assets and assumed liabilities in business combinations, useful
lives and impairment of property and equipment, intangible assets, goodwill and other assets, the fair value of equity-based
compensation awards, and deferred income tax assets and liabilities. Actual results could differ materially from those estimates.
On an ongoing basis, we evaluate our estimates compared to historical experience and trends, which form the basis for making
judgments about the carrying value of our assets and liabilities.
Revenue Recognition
We recognize revenue when four basic criteria are met: persuasive evidence of a sales arrangement exists; performance of
services has occurred; the sales price is fixed or determinable; and collectability is reasonably assured. We consider persuasive
evidence of a sales arrangement to be the receipt of a signed contract. Collectability is assessed based on a number of factors,
including transaction history and the credit worthiness of a customer. If it is determined that collection is not reasonably assured,
revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. We record cash
received in advance of revenue recognition as deferred revenue.
For arrangements with multiple deliverables, we allocate revenue to each deliverable if the delivered item(s) has value to the
customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or
performance of the undelivered item(s) is considered probable and substantially in our control. The fair value of the selling price
for a deliverable is determined using a hierarchy of (1) Company-specific objective and reliable evidence, then (2) third party
evidence, then (3) best estimate of selling price. We allocate any arrangement fee to each of the elements based on their relative
selling prices. F-9
Table of Contents
Our revenue is principally derived from the following services and products:
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 The Other Art
Fair, including commissions from the sale of original art, fees paid by artists for stands at the fairs and sponsorship opportunities
at the fairs. We recognize service revenue arising from the sale of original art net of amounts paid to the artist because we are not
the primary obligor in the transaction, we do not have inventory risk, and we do not establish the prices for the art sold. Revenue
is recognized after the original art has been delivered and the return period has expired. Payments received in advance of delivery
and completion of the return period are included in deferred revenue in the accompanying consolidated balance sheets. We
periodically provide incentive offers to Saatchi Art customers to encourage purchases, including percentage discounts off current
purchases, free shipping and other offers. Value-added taxes (“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 performance-based costper-click advertising, in which an advertiser pays only when a visitor clicks on an advertisement; display advertisements, where
revenue is dependent upon the number of advertising impressions delivered; native advertisements, which are advertisements
created to match the form and function of the platform on which they appear; sponsored content; or advertising links . In
determining whether an arrangement exists, we ensure that a binding arrangement is in place, such as a standard insertion order or
a fully executed partner-specific agreement. 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 and whether the
fees are fixed or determinable based on a reconciliation of the performance criteria and an analysis of the payment terms
associated with the transaction. 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 primary obligor and principal in the
transaction. In addition, we consider which party has the latitude to establish the sales prices to advertisers and which party
assumes the collection risk in these arrangements. When we are considered the primary obligor, have the latitude to determine
pricing and assume the collection risk, 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 content has been delivered and the contractual performance obligations
have been fulfilled. Revenue from the non-perpetual license of media content is recognized over the period of the license as
content is delivered or when other related performance criteria are fulfilled. In circumstances where we distribute our content on
third party properties and the customer acts as the primary obligor, we recognize revenue on a net basis.
Social
Media
Services.
Prior to the sale of our Pluck social media business, we configured, hosted, and maintained our
platform for social media services under private-labeled versions of software for commercial customers. We earned revenue from
our social media services through recurring management support fees, overage fees in excess
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of standard usage terms, outside consulting fees and initial set-up fees. Due to the fact that social media services customers had no
contractual right to take possession of our private-labeled software, we accounted for our social media services revenue as service
arrangements. Social media services revenue was recognized when persuasive evidence of an arrangement existed, delivery of the
service had occurred and no significant obligations remained, the selling price was fixed or determinable, and collectability was
reasonably assured. In February 2015, we sold our Pluck social media business and we no longer provide any social media
services. The consideration we received for Pluck was a $3.8 million cash payment after working capital adjustments, resulting in
a gain of $2.1 million, which is recorded in other income, net.
Product Revenue
We recognize product revenue from sales of Society6 products upon delivery, net of estimated returns and sales allowances
based on historical experience. We recognize product revenue from the sale of prints through Saatchi Art when the prints are
delivered and the return period has expired. Payments received in advance of delivery and, with respect to the Saatchi Art prints,
prior to completion of the return period are included in deferred revenue in the accompanying consolidated balance sheets.
Product revenue is recorded at the gross amount due to the following factors: we are the primary obligor in a transaction, we have
inventory and credit risk, and we have latitude in establishing prices and selecting suppliers. We periodically provide incentive
offers to customers to encourage purchases, including percentage discounts off current purchases, free shipping and other offers.
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 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 revenuesharing arrangements where we are the primary obligor. In addition, service costs include expenses related to art fairs hosted by
The Other Art Fair, such as venue-related costs and fair personnel costs.
Product Costs
Product costs consist of outsourced product manufacturing costs, artist royalties, personnel costs and credit card and other
transaction fees.
Shipping and Handling
Shipping and handling charged to customers are recorded in service revenue or product revenue, as applicable. Associated
costs are recorded in service costs or product costs.
Advertising Costs
Advertising costs are expensed as incurred and generally consist of Internet based advertising, sponsorships, and trade
shows. Such costs are included in sales and marketing expense in our consolidated statements of operations. Advertising expense,
not including customer acquisition marketing costs, was $3.1 million, $1.9 million and $2.2 million for the years ended December
31, 2016, 2015 and 2014, respectively.
Operating Leases
For operating leases that include rent-free periods or escalation clauses over the term of the lease, we recognize rent expense
on a straight-line basis and the difference between expense and amounts paid are recorded as deferred rent in current and longterm liabilities.
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Product Development and Software Development Costs
Product development expenses consist primarily of expenses incurred in research and development, software engineering
and web design activities and related personnel compensation to create, enhance and deploy our software infrastructure. Product
and software development costs, other than software development costs qualifying for capitalization, are expensed as incurred.
Costs of computer software developed or obtained for internal use that are incurred in the preliminary project and post
implementation stages are expensed as incurred. Certain costs incurred during the application and development stage, which
include compensation and related expenses, costs of computer hardware and software, and costs incurred in developing additional
features and functionality of the services, are capitalized. The estimated useful life of costs capitalized is evaluated for each
specific project. Capitalized costs are generally amortized using the straight-line method over a three year estimated useful life,
beginning in the period in which the software is ready for its intended use. Unamortized amounts are included in property and
equipment, net in the accompanying consolidated balance sheets. The net book value of capitalized software development costs is
$ 6.4 million (net of $ 13.4 million accumulated amortization) and $7.2 million (net of $15.6 million accumulated amortization) as
of December 31, 2016 and 2015, respectively.
Income Taxes
Deferred income taxes are recognized for differences between financial reporting and tax bases of assets and liabilities at
the enacted statutory tax rates in effect for the years in which the temporary differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate the
realizability of deferred tax assets and recognize a valuation allowance for our deferred tax assets when it is more likely than not
that a future benefit on such deferred tax assets will not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the
consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon settlement. We recognize interest and penalties accrued related to unrecognized tax benefits in
our income tax (benefit) provision in the accompanying consolidated statements of operations.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based payment awards made to employees, non-employees
and directors based on the grant date fair values of the awards. Our stock-based payment awards are comprised principally of
restricted stock units and stock options.
For stock-based payment awards issued to employees with service based vesting conditions the fair value is estimated using
the Black-Scholes-Merton option pricing model. For premium-priced stock options with service and/or performance-based vesting
conditions, the fair value is estimated using the Hull-White model. The value of an award that is ultimately expected to vest is
recognized as expense over the requisite service periods in our consolidated statements of operations. We elected to treat stockbased payment awards with graded vesting schedules and time-based service conditions as a single award and recognize stockbased compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. Stock-based
compensation expense is classified in the consolidated statements of operations based on the department to which the related
employee provides service.
The Black-Scholes-Merton option pricing model requires management to make assumptions and to apply judgment in
determining the fair value of our awards. The most significant assumptions and judgments include the expected volatility,
expected term of the award and estimated forfeiture rates.
We estimated the expected volatility of our awards from the historical volatility of selected public companies with
comparable characteristics to Leaf Group, including similarity in size, lines of business, market capitalization, revenue and
financial leverage. We calculated the weighted average expected life of our options based upon our historical experience of option
exercises combined with estimates of the post-vesting holding period. The risk-free interest rate is based on the implied yield
currently available on U.S. Treasury notes with terms approximately equal to the expected
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life of the option. The expected dividend rate is zero as we currently have no history or expectation of paying cash dividends on
our common stock. The forfeiture rate is established based on applicable historical forfeiture patterns adjusted for any expected
changes in future periods.
Under the Leaf Group Employee Stock Purchase Plan (“ESPP”), during any offering period, eligible officers and employees
can purchase a limited amount of Leaf Group’s common stock at a discount to the market price in accordance with the terms of
the plan. We use the Black-Scholes-Merton option pricing model to determine the fair value of the ESPP awards granted which is
recognized straight-line over the total offering period.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by
dividing the net income (loss) attributable to common stockholders by the weighted average common shares outstanding plus
potentially dilutive common shares. Restricted stock units (“RSUs”) are considered outstanding common shares and included in
the computation of basic income (loss) per share as of the date that all necessary conditions of vesting are satisfied. RSUs, stock
options and stock issued pursuant to the ESPP are excluded from the diluted net income (loss) per share calculation when their
impact is antidilutive. We reported a net loss for the years ended December 31, 2016, 2015 and 2014, and as a result, all
potentially dilutive common shares are considered antidilutive for these periods.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of 90 days or less at the time of purchase to be cash equivalents.
Cash and cash equivalents consist primarily of checking accounts, money market accounts, money market funds, and short-term
certificates of deposit.
Accounts Receivable
Accounts receivable primarily consist of amounts due from:
·
Third parties who provide advertising services to our owned and operated media properties in exchange for a share of
the underlying advertising revenue. Accounts receivable from third parties are recorded as the amount of the revenue
share as reported to us by the advertising networks;
·
Third party brands, publishers, and advertisers who engage us to create and publish content in a wide variety of
formats including videos, articles, and designed visual formats;
·
Direct advertisers who engage us to deliver branded advertising impressions. Accounts receivable from direct
advertisers are recorded at negotiated advertising rates (customarily based on advertising impressions) and as the
related advertising is delivered over our owned and operated media properties;
·
Partners who syndicate our content over their websites in exchange for a share of related advertising revenue.
Accounts receivable from these partners are recorded as the revenue share as reported by the underlying partners;
·
Credit card processors who facilitate the settlement of electronic payments from our marketplaces customers.
Accounts receivable from credit card processors are typically received into our accounts at financial institutions
within three business days.
We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables from third parties based
on our best estimate of the amount of probable losses in existing accounts receivable. We determine the allowance based on an
analysis of historical bad debts, advertiser concentrations, advertiser credit-worthiness and
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current economic trends. In addition, past due balances over 60 days and specific other balances are reviewed individually for
collectability at least quarterly.
The allowance for doubtful account activity is as follows (in thousands):
December 31, 2016 $
December 31, 2015 $
December 31, 2014 $
Balance at
beginning of
period
197 $
218 $
340 $
Charged to
costs and
expenses
Write-offs, net
of recoveries
228 $
52 $
— $
(398) $
(73) $
(122) $
Balance at
end of
period
27 197 218 Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. Computer equipment is amortized over three years, software is amortized
over two to three years, and furniture and fixtures are amortized over five years. Leasehold improvements are amortized straightline over the shorter of the remaining lease term or the estimated useful lives of the improvements ranging from one to ten years.
Upon the sale or retirement of property or equipment, the cost and related accumulated depreciation or amortization is removed
from our financial statements with the resulting gain or loss reflected in our results of operations. Repairs and maintenance costs
are expensed as incurred. In the event that property and equipment is no longer in use, we will record a loss on disposal of the
property and equipment, which is computed as difference between the sales price, if any, and the net remaining value (gross
amount of property and equipment less accumulated depreciation expense) of the related equipment at the date of disposal.
Intangible Assets — Media Content
We capitalize the direct costs incurred to acquire our media content that is determined to embody a probable future
economic benefit. Costs are recognized as finite-lived intangible assets based on their acquisition cost to us. All costs incurred to
deploy and publish content are expensed as incurred, including the costs incurred for the ongoing maintenance of websites on
which our content resides. We generally acquire content when our internal systems and processes provide reasonable assurance
that, given predicted consumer and advertiser demand relative to our predetermined cost to acquire the content, the content unit
will generate revenue over its useful life that exceeds the cost of acquisition. In determining whether content embodies a probable
future economic benefit required for asset capitalization, we make judgments and estimates including the forecasted number of
visits and the advertising rates that the content will generate. These estimates and judgments take into consideration various
inherent uncertainties including, but not limited to, total expected visits over the content’s useful life; the fact that our content
creation and distribution model is evolving and may be impacted by competition and technological advancements; our ability to
expand existing and enter into new distribution channels and applications for our content; and whether we will be able to generate
similar economic returns from content in the future. Management has reviewed, and intends to regularly review, the operating
performance of content in determining probable future economic benefits of our content.
Capitalized media content is amortized on a straight-line basis over its useful life, which is typically five years, representing
our estimate of when the underlying economic benefits are expected to be realized and based on our estimates of the projected
cash flows from advertising revenue expected to be generated by the deployment of such content. These estimates are based on
our plans and projections, comparison of the economic returns generated by our content with content of comparable quality and an
analysis of historical cash flows generated by that content to date. We continue to perform evaluations of our existing content library to identify potential improvements in our content
creation and distribution platform. As a result of these evaluations, we elected to remove certain content units from our content
library, resulting in $1.9 million, $3.4 million and $7.7 million of related accelerated amortization expense in the years ended
December 31, 2016, 2015 and 2014, respectively.
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Intangibles Assets — Acquired in Business Combinations
We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business
combination, with the primary technique being a discounted cash flow analysis, and allocate the purchase price of each acquired
business to our respective net tangible and intangible assets. Acquired intangible assets may include: trade names, non-compete
agreements, owned website names, artist relationships, customer relationships, technology, media content, and content publisher
relationships. We determine the appropriate useful life by performing an analysis of expected cash flows based on historical
experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line
method which approximates the pattern in which the economic benefits are consumed.
Recoverability of Long-lived Assets
We evaluate the recoverability of our long-lived tangible and intangible assets with finite useful lives for impairment when
events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Such trigger
events or changes in circumstances may include: a significant decrease in the market price of a long-lived asset, a significant
adverse change in the extent or manner in which a long-lived asset is being used, a significant adverse change in legal factors or in
the business climate, including those resulting from technology advancements in the industry, the impact of competition or other
factors that could affect the value of a long-lived asset, a significant adverse deterioration in the amount of revenue or cash flows
we expect to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for
the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing
losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be
sold or otherwise disposed of significantly before the end of its previously estimated useful life. We perform impairment testing at
the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of
other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be
recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of
the asset group, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Fair value is
determined based upon estimated discounted future cash flows. We did not recognize any impairment loss for long-lived assets for
the years ended December 31, 2016, 2015 and 2014. Assets to be disposed of or held for sale would be separately presented on the
balance sheets and reported at the lower of their carrying amount or fair value less costs to sell, and would no longer be
depreciated or amortized.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is
tested for impairment annually as of October 1st or when events or circumstances change in a manner that indicates goodwill
might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant
adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated
competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our
overall business, significant negative industry or economic trends, a decline in our stock price leading to an extended period when
our market capitalization is less than the book value of our net assets, or significant underperformance relative to expected
historical or projected future results of operations.
Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment.
As of December 31, 2016, we have two reporting units: marketplaces and media and our goodwill balance related entirely to our
marketplaces reporting unit .
When testing goodwill for impairment, we first perform a qualitative assessment to determine whether it is necessary to
perform step one of a two-step goodwill impairment test for each reporting unit. We are required to perform step one only if we
conclude that it is more likely than not that a reporting unit’s fair value is less than the carrying value of its assets. Should this be
the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair
values of our reporting units with their respective carrying values, including goodwill. If the estimated fair value of a reporting
unit exceeds the carrying value, goodwill is not considered to be impaired and no additional steps are necessary. If, however, the
fair value of a reporting unit is less
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than its carrying value, then a second step is performed to measure the amount of the impairment loss, if any. The amount of the
impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value
of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit, but may
require valuations of certain internally generated and unrecognized intangible assets such as our software, technology, patents and
trademarks.
Fair Value of Financial Instruments
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. We measure our financial assets and liabilities in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine fair value.
·
Level 1—valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds
that allow a company to sell its ownership interest back at net asset value on a daily basis. Valuations are obtained
from readily available pricing sources for market transactions involving identical assets, liabilities or funds.
·
Level 2—valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for
similar assets or liabilities or quoted prices in markets that are not active. Level 2 includes U.S. Treasury, U.S.
government and agency debt securities, and certain corporate obligations. Valuations are usually obtained from third
party pricing services for identical or comparable assets or liabilities.
·
Level 3—valuations for assets and liabilities that are derived from other valuation methodologies, such as option
pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or
broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair
value assigned to such assets or liabilities.
We report certain financial assets and liabilities at their carrying amounts. The carrying amounts of our financial
instruments, which include cash and cash equivalents, accounts receivable, restricted cash, accounts payable, and accrued
liabilities approximate fair value because of their short maturities. Certain assets, including goodwill, intangible assets and other
long-lived assets, are also subject to measurement at fair value on a nonrecurring basis, if they are deemed to be impaired as the
result of an impairment review.
Assets Held-For-Sale
We report a business as held-for-sale when management has approved or received approval to sell the business and is
committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is
probable and anticipated to occur during the ensuing year and certain other specified criteria are met. A business classified as
held-for-sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the
business exceeds its estimated fair value, a loss is recognized. Depreciation is not recorded on long-lived assets of a business
classified as held-for-sale. Assets and liabilities related to a business classified as held-for-sale are segregated in the consolidated
balance sheet and may be included in an “other assets” or “other liabilities” line item or, if material, presented as a separate line
item on the balance sheet. Major classes are separately disclosed in the notes to the consolidated financial statements commencing
in the period in which the business is classified as held-for-sale.
Deferred Revenue
Deferred revenue consists of amounts received from or invoiced to customers before we have met all four criteria for the
recognition of revenue. Deferred revenue includes payments received from sales of our products on Society6 prior to delivery of
such products; payments made for original art and prints sold via Saatchi Art that are collected prior to the completion of the
return period; amounts billed to custom content customers prior to delivery of content; and sales of subscriptions for premium
content or services not yet delivered.
F-16
Table of Contents
Stock Repurchases
Under a stock repurchase plan, shares repurchased by us are accounted for when the transaction is settled. Repurchased
shares held for future issuance are classified as treasury stock. Shares formally or constructively retired are deducted from
common stock at par value and from additional paid in capital for the excess over par value. If additional paid in capital has been
exhausted, the excess over par value is deducted from retained earnings. Direct costs incurred to acquire the shares are included in
the total cost of the repurchased shares.
Foreign Currency Transactions
Foreign currency transaction gains and losses are charged or credited to earnings as incurred. For the years ended December
31, 2016, 2015 and 2014, foreign currency transaction gains and losses that are included in other income (expense) in the
accompanying statements of operations were not significant.
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated into U.S. dollars. Where the functional currency of a foreign
subsidiary is its local currency, balance sheet accounts are translated at the balance sheet date exchange rate and income statement
items are translated at the average exchange rate for the period. Gains and losses resulting from translation are included in
accumulated other comprehensive earnings within stockholders’ equity.
Discontinued Operations
We report the results of operations of a business as discontinued operations if the disposal of a component represents a
strategic shift that has (or will have) a major effect on our operations and financial results. The results of discontinued operations
are reported in net income (loss) from discontinued operations in the consolidated statements of operations for current and prior
periods commencing in the period in which the business meets the criteria of a discontinued operation, and include any gain or
loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell. The financial results of Rightside
are presented as discontinued operations in our accompanying consolidated statements of operations for the year ended December
31, 2014.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 201409, Revenue
from
Contracts
with
Customers
, which will supersede nearly all existing revenue recognition guidance under U.S.
GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services
to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods
or services. Further, the guidance requires improved disclosures to help users of financial statements better understand the nature,
amount, timing and uncertainty of revenue that is recognized. The guidance is effective for the Company commencing in the first
quarter of fiscal year 2018. The new revenue standard may be applied retrospectively to each prior period presented or
retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact
of adopting the new revenue standard on the consolidated financial statements and considering additional disclosure requirements.
The Company expects to adopt this standard in the first quarter of fiscal year 2018 using the modified retrospective method with
the cumulative effect recognized as of the date of adoption.
In August 2014, the FASB issued ASU 2014-15, Disclosure
of
Uncertainties
About
an
Entity's
Ability
to
Continue
as
a
Going
Concern
, which requires management to evaluate, in connection with preparing financial statements for each annual and
interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an
entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and provide
related disclosures. This guidance was effective for the Company on December 31, 2016. The adoption of the standard did not
have an impact to the Company's consolidated financial statements. F-17
Table of Contents
In September 2015, the FASB issued ASU 2015-16, Business
Combinations:
Simplifying
the
Accounting
MeasurementPeriod
Adjustments
. This update simplifies the accounting for adjustments made to provisional amounts recognized in a business
combination by eliminating the requirement to retrospectively account for those adjustments. Under this update, the adjustments
are recognized in the reporting period in which the adjustment amounts are determined. This update is effective for the Company
commencing in the first quarter of fiscal year 2016 and should be applied prospectively. The Company adopted the standard
effective January 1, 2016, and there has been no impact to the consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income
Taxes
(Topic
740):
Balance
Sheet
Classification
of
Deferred
Taxes
. This amended guidance requires an entity to present deferred tax assets and liabilities as noncurrent in the statement of
financial position. The amended guidance is effective for the Company commencing in the first quarter of fiscal year 2018. Early
adoption is permitted and the guidance may be applied either prospectively to all deferred tax assets and liabilities or
retrospectively to all periods presented. The Company elected to prospectively adopt the standard effective January 1, 2016 and
believes the application of the guidance simplifies and improves the usefulness of deferred tax information for users of the
Company’s financial statements. No prior periods were retrospectively adjusted.
In February 2016, the FASB issued ASU 2016-02, Leases
(Topic
842)
. This update will require lease assets and lease
liabilities to be recognized on the balance sheet and disclosure of key information about leasing arrangements. This guidance is
effective for the Company commencing in the first quarter of fiscal year 2019 and must be adopted using a modified retrospective
transition, and provides for certain practical expedients. Early adoption is permitted. The Company is currently evaluating the
impact of this standard on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements
to
Employee
Share-Based
Payment
Accounting
. This
standard makes several modifications to Topic 718 related to the accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
This guidance is effective for the Company commencing in the first quarter of fiscal year 2017. Early adoption is permitted. The
guidance does not have a material impact to the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles
–
Goodwill
and
Other
(Topic
350)
. This standard simplifies
the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires
an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying
amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's
fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity
still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is
necessary. The amendment should be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this
standard on the consolidated financial statements.
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3. Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31, December 31,
2016
2015
Computers and other related equipment
Purchased and internally developed software
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation
Property and equipment, net
$
$
8,656 $
27,601 1,472 6,694 44,423 (32,920) 11,503 $
16,588 34,868 1,423 7,296 60,175 (45,607) 14,568 At December 31, 2016 and 2015, total software under capital lease and vendor financing obligations was $3.8 million and
was fully amortized. Amortization expense for assets under capital lease and vendor financing obligations was not material for the
years ended December 31, 2016, 2015 and 2014.
Depreciation expense for the periods shown is classified as follows (in thousands):
Service costs
Sales and marketing
Product development
General and administrative
Discontinued operations
Total depreciation
$
$
Year ended December 31,
2016
2015
3,563
49
138
3,440
—
7,190
$
$
5,965
67
200
4,946
—
11,178
$
$
2014
6,798
156
496
4,802
4,662
16,914
As a result of the shortening our estimated useful lives for certain assets, we recorded accelerated depreciation expense of
approximately $1.2 million, $2.1 million and $1.3 million for the years ended December 31, 2016, 2015 and 2014.
4. Intangible Assets
Intangible assets consisted of the following (in thousands):
Customer relationships
Artist relationships
Media content
Technology
Non-compete agreements
Trade names
$
$
Gross carrying
amount
1,453
11,916
91,616
5,654
25
7,539
118,203
F-19
December 31, 2016
Accumulated
amortization
$
$
(1,252) (10,337) (87,604) (3,649) (11) (4,077) (106,930) Net carrying
amount
$
$
201
1,579
4,012
2,005
14
3,462
11,273
Weighted average
useful life (years)
3.7
4.1
5.1
4.7
3.0
10.2
Table of Contents
Customer relationships
Artist relationships
Media content
Technology
Non-compete agreements
Trade names
$
$
Gross carrying
amount
1,628
11,719
95,785
5,854
217
7,150
122,353
December 31, 2015
Accumulated
amortization
(1,107) (8,340) (85,018) (2,842) (160) (3,554) (101,021) $
$
Net carrying
amount
Weighted average useful life (years) 521
3,379
10,767
3,012
57
3,596
21,332
$
$
3.8
4.1
5.1
4.7
3.0
10.5
Identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives.
Amortization expense by classification is shown below (in thousands):
Service costs
Sales and marketing
Product development
General and administrative
Discontinued operations
Total amortization
$
$
Year ended December 31,
2016
2015
7,037
2,319
987
557
—
10,900
$
$
12,680
3,862
1,440
724
—
18,706
$
$
2014
28,523
4,733
4,212
847
4,244
42,559
Service costs for the years ended December 31, 2016, 2015 and 2014 includes an accelerated amortization charge of $1.9
million, $3.4 million and $7.7 million, respectively, as a result of the removing certain content assets from service.
Based upon the current amount of intangible assets subject to amortization, the estimated amortization expense for the next
five years as of December 31, 2016 is as follows (in thousands):
Year ending December 31,
2017
2018
2019
2020
2021
Thereafter
5. Goodwill
Estimated
Amortization
4,904
2,688
1,136
700
645
1,200
$
$
$
$
$
$
The following table presents the changes in our goodwill balance (in thousands):
Balance at December 31, 2014
Balance at December 31, 2015
Acquisitions
Foreign currency impact
Balance at December 31, 2016
$
$
10,358 10,358 851 (42) 11,167 For the year ended December 31, 2014, due to unexpected revenue declines attributable to lower traffic and monetization
yields on certain of our media websites, we lowered our future cash flow expectations. As a result of the
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decline in our cash flow forecast as well as a sustained decline in our market capitalization which remained at a level below the
book value of our net assets for an extended period of time, we performed an interim assessment of impairment of the goodwill in
our media reporting unit, which at the time was our only reporting unit, in the third quarter of 2014. Based on a two-step
quantitative analysis using valuation methodologies appropriate for the valuation of the reporting unit’s assets and liabilities, we
determined that the implied fair value of goodwill was substantially lower than the carrying value of goodwill for the reporting
unit and as a result, we determined that the implied fair value of the goodwill in the reporting unit was zero. Accordingly, we
recorded $232.3 million for the goodwill impairment charge in 2014.
During the year ended December 31, 2015, we made certain changes to our management structure below our chief operating
decision maker and, as a result of these changes, we determined that Society6, which had previously been included in our media
reporting unit, should be combined with the Saatchi Art reporting unit to create a marketplaces reporting unit. As a result of these
changes we determined that we have two reporting units: marketplaces and media . A change in reporting units requires that
goodwill be tested for impairment. Therefore, we performed an interim assessment of impairment of goodwill for the Saatchi Art
reporting unit during the second quarter of 2015 and determined an impairment did not exist. We performed our annual
impairment analysis using a qualitative analysis in the fourth quarter of 2015, and determined that no impairment of goodwill
existed for the year ended December 31, 2015.
As of December 31, 2016, we have two reporting units, marketplaces and media, and our goodwill balance related entirely
to our marketplaces reporting unit. For the year ended December 31, 2016, we elected to perform a step one impairment analysis
as part of our annual goodwill impairment test and determined that there was no impairment charge for the year ended December
31, 2016 . We may be required to record goodwill impairment charges in future periods . The change in goodwill in 2016 is
attributable to the acquisition of Other Art Fairs Ltd, which operates as The Other Art Fair, in July 2016. See Note 16 for
additional information.
6. Other Assets
As of December 31, 2016, prepaid expenses and other current assets include $3.9 million in cash from the sale of our
Cracked business that was placed into escrow to cover certain of our post-closing indemnification obligations. Any remaining
portion of the escrow amount that is not subject to then-pending claims will be paid to us in July 2017, on the 15-month
anniversary of the closing date of the sale. At December 31, 2016 and 2015, we had a cash collateralized standby letter of credit
for approximately $1.0 million and $1.2 million, respectively, included in long-term assets, associated with the lease of our
headquarters office.
During the year ended December 31, 2015, we received a payment of $5.1 million, plus accrued and unpaid interest, on the
promissory note that we received as part of the consideration for the sale of our CoveritLive business in July 2014. This
promissory note had a principal amount of $5.6 million and was originally due in full by July 2016. The early repayment of $5.1
million, plus accrued and unpaid interest, satisfied all amounts owed to us under the promissory note and the promissory note was
discharged. The discount from the carrying value of the promissory note was approximately $0.1 million, which was recorded as
interest income.
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
Accrued payroll and related items
Artist payables
Accrued product costs
Accrued marketing
Other
Accrued expenses and other current liabilities
$
$
F-21
December 31, December 31,
2016
2015
4,239
3,982
1,566
1,456
3,774
15,017
$
$
5,916
2,816
1,604
307
4,526
15,169
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During the year ended December 31, 2016, we recognized severance costs of $1.7 million primarily as a result of actions
taken in June 2016 to streamline our content publishing studio (formerly known as our studioD business) and better integrate this
business into our broader Media service offering. These severance costs were recognized in the condensed consolidated
statements of operations as follows: $0.7 million in sales and marketing costs, $0.6 million in product development costs, $0.3
million in service costs, and $0.1 million in general and administrative costs. Severance amounts related to these actions were
fully paid as of December 31, 2016. During the year ended December 31, 2015, we implemented a number of initiatives to improve operating efficiency,
including targeted reductions in force in areas where our business model shifted during the year. For the year ended December 31,
2015, we incurred $2.2 million in severance costs primarily related to certain workforce reduction actions that occurred during the
year. These severance costs were recognized in the consolidated statements of operations for the year ended December 31, 2015
as follows: $1.1 million in product development costs, $0.6 million in service costs, $0.4 million in general and administrative
costs, and $0.1 million in sales and marketing costs. Severance costs include severance pay, the provision of certain extended
employee benefits, and employer taxes.
Changes to the severance accrual during the years ended December 31, 2016 and 2015 are as follows (in thousands):
Balance at December 31, 2014
New charges
Cash payments
Balance at December 31, 2015
New charges
Cash payments
Balance at December 31, 2016
$
$
—
2,183
(1,698)
485
1,690
(2,175)
—
8. Debt
In November 2014, we repaid all amounts outstanding under our credit agreement, dated August 29, 2013, with Silicon
Valley Bank, as administrative agent, and the lenders and other agents party thereto (the “Credit Agreement”) and terminated the
Credit Agreement and the related Guarantee and Collateral Agreement. The Credit Agreement had provided for a $100.0 million
senior secured term loan facility (the “Term Loan Facility”) and a $125.0 million senior secured revolving loan facility (the
“Revolving Loan Facility”), each of which was scheduled to mature on August 29, 2018. At the time of termination, there was
approximately $73.8 million outstanding under the Term Loan Facility, no principal balance outstanding under the Revolving
Loan Facility and an outstanding standby letter of credit with a face amount of approximately $1.4 million. We used cash on hand
to pay all outstanding principal, interest and other amounts owing under the Credit Agreement as of the termination date and to
cash collateralize the outstanding standby letter of credit.
In connection with entering into the Credit Agreement in August 2013, we incurred debt issuance costs of $1.9 million.
Debt issuance costs are capitalized and amortized into interest expense over the term of the underlying debt. Due to the repayment
in full of all amounts under the credit facility in November 2014, there were no amortized deferred debt issuance costs during
2015. During the year ended December 31, 2014, we amortized $0.5 million of deferred debt issuance costs. In connection with
the termination of the Credit Agreement, we recorded a non-cash expense of $1.7 million from the acceleration of unamortized
debt issuance costs during the year ended December 31, 2014.
9. Commitments and Contingencies
Leases
We conduct our operations utilizing leased office facilities in various locations under operating leases with non-cancelable
periods ending between February 2018 and February 2020.
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The following is a schedule of future minimum lease payments under operating and capital leases as of December 31, 2016
(in thousands):
Year ending December 31,
2017
2018
2019
2020
Thereafter
Total minimum lease payments
Operating
leases
$
$
2,179
3,573
1,517
27
—
7,296
We incurred rent expense of $2.3 million, $2.9 million and $3.5 million, respectively, for the years ended December 31,
2016, 2015 and 2014. As of December 31, 2016 and 2015, other long-term liabilities include a deferred rent liability of $1.5
million and $1.6 million, respectively. Litigation
From time to time we are a party to various legal matters incidental to the conduct of our business. Certain of our
outstanding legal matters include speculative claims for indeterminate amounts of damages. We record a liability when we believe
that it is probable that a loss has been incurred and the amount can be reasonably estimated. Based on our current knowledge, we
do not believe that there is a reasonable possibility that the final outcome of the pending or threatened legal proceedings to which
we are a party, either individually or in the aggregate, will have a material adverse effect on our future financial results. However,
the outcome of such legal matters is subject to significant uncertainties.
Taxes
From time to time, various federal, state and other jurisdictional tax authorities undertake reviews of the Company and its
filings. In evaluating the exposure associated with various tax filing positions, we accrue charges for possible exposures. We
believe any adjustments that may ultimately be required as a result of any of these reviews will not be material to our consolidated
financial statements.
Indemnifications
In the normal course of business, we have provided certain indemnities, commitments and guarantees under which we
may be required to make payments in relation to certain transactions or contractual commitments. These indemnities include
intellectual property indemnities to our customers and partners, indemnities to our directors and officers to the maximum extent
permitted under the laws of Delaware, indemnifications related to our lease agreements and indemnifications to sellers or buyers
in connection with acquisitions and dispositions, respectively. In addition, our advertiser, content creation and distribution partner
agreements contain certain indemnification provisions, which are generally consistent with those prevalent in our industry. We
have not incurred significant obligations under indemnification provisions historically, and do not expect to incur significant
obligations in the future. Accordingly, we have not recorded any liability for these indemnities.
10. Income Taxes
Income (loss) before income taxes from continuing operations consisted of the following (in thousands):
Domestic
Foreign
Loss from continuing operations before income taxes
$
$
F-23
2016
(1,856) $
(165) (2,021) $
2015
(43,518) $
72 (43,446) $
2014
(267,758) (3,104) (270,862) Table of Contents
The income tax benefit (expense) from continuing operations consisted of the following (in thousands):
Current (expense) benefit:
Federal
State
International
Deferred (expense) benefit:
Federal
State
International
Total income tax benefit (expense) from continuing operations
$
$
2016
— (6) (22) — — 38 10 $
$
2015
— (32) (23) — — — (55) $
$
2014
— (58) (99) 14,028 831 11 14,713 The reconciliation of the federal statutory income tax rate of 35% to our effective income tax rate from continuing
operations is as follows (in thousands):
Expected income tax benefit at U.S. statutory rate
Difference between U.S. and foreign taxes
State tax (expense) benefit, net of federal taxes
Stock-based compensation
Meals and entertainment
Goodwill impairment
Non-deductible officer compensation
Change in statutory state tax rate
Valuation allowance
Other
Total income tax benefit (expense) from continuing operations
$
$
2016
707 (32) (41) (725) (98) — — (1,371) 1,549 21 10 $
$
2015
15,198 6 983 (982) (135) — — (1,604) (13,509) (12) (55) $
$
2014
94,801 21 4,828 (3,845) (129) (25,841) (43) (865) (53,463) (751) 14,713 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities are presented below (in thousands):
Deferred tax assets:
Accrued liabilities not currently deductible
Intangible assets—excess of tax basis over financial statement basis
Federal impact of deferred state taxes
Net operating losses
Stock-based compensation
Other
Deferred tax liabilities:
Intangible assets—excess of financial statement basis over tax basis
Property and equipment
Deferred gain on sale
Valuation allowance
Net deferred tax liabilities
Current
Non-current
F-24
$
$
$
$
December 31,
2016
2,479 37,693 (3,242) 52,367 3,640 408 93,345 (677) (1,169) (1,555) (3,401) (90,052) (108) — (108) (108) $
$
$
$
December 31,
2015
3,454 45,138 (4,518) 50,038 2,565 203 96,880 (1,751) (2,251) — (4,002) (92,878) — 551 (551) — Table of Contents
During the year ended December 31, 2016, we elected to prospectively adopt ASU 2015-17, Income
Taxes
(Topic
740):
Balance
Sheet
Classification
of
Deferred
Taxes,
effective January 1, 2016. No prior periods were retrospectively adjusted. The
impact of adoption if applied retrospectively to the year ended December 31, 2015 would have been a decrease of $0.5 million in
prepaid and other current assets and other liabilities in the consolidated balance sheet as of December 31, 2015.
We had federal net operating loss (“NOL”) carryforwards of approximately $155.5 million and $143.4 million as of
December 31, 2016 and 2015, respectively, which expire between 2021 and 2036. In addition, as of December 31, 2016 and 2015
we had state NOL carryforwards of approximately $62.6 million and $73.0 million, which expire between 2017 and 2036.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of
net operating loss and credit carryforwards if we were to undergo an ownership change, as defined in Section 382. Changes in our
equity structure and the acquisitions made by us in prior years resulted in such an ownership change. 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.
We reduce the deferred tax asset resulting from future tax benefits by a valuation allowance if, based on the weight of the
available evidence, it is more likely than not that some portion or all of these deferred taxes will not be realized. We have
determined it is more likely than not that we will not realize the benefit of all our deferred tax assets and accordingly a valuation
allowance of $90.1 million and $92.9 million against our deferred taxes was required at December 31, 2016 and 2015,
respectively. The change in the valuation allowance for the years ended December 31, 2016, 2015 and 2014 was a decrease of
$2.8 million, an increase of $4.4 million and an increase of $64.6 million, respectively, all of which was recorded in income tax
benefit (expense) from continuing operations. As we have no sustained history of generating book income, the ultimate future
realization of these excess deferred tax assets is not more likely than not and thus subject to a valuation allowance.
Accounting standards related to stock-based compensation prohibit the tax attributes related to the exercise of employee
stock options from being realized in the financial statements until they result in a decrease to taxes payable. Therefore, we have
not included unrealized stock option tax attributes in our deferred tax assets. Cumulative tax attributes excluded through 2016
were $18.2 million.
We are subject to the accounting guidance for uncertain income tax positions. We believe that our income tax positions and
deductions will be sustained on audit and do not anticipate any adjustments that will result in a material adverse effect on our
financial condition, results of operations, or cash flow.
Our policy for recording interest and penalties associated with audits and uncertain tax positions is to record such items as a
component of income tax expense, and amounts recognized to date are not material. There are no material uncertain income tax
positions during 2016, 2015 or 2014 and we do not expect our uncertain tax positions to have a material impact on our
consolidated financial statements within the next twelve months. The total gross amount of unrecognized tax benefits was not
material for the years ended December 31, 2016 and 2015.
We file a U.S. federal and various state tax returns. The tax years 2007 to 2016 remain subject to examination by the
Internal Revenue Service and most tax years since our incorporation are subject to examination by various state authorities.
11. Employee Benefit Plan
We have a defined contribution plan under Section 401(k) of the Internal Revenue Code (“401(k) Plan”) covering all fulltime employees who meet certain eligibility requirements. Eligible employees may defer up to 90% of their pretax eligible
compensation, up to the annual maximum allowed by the Internal Revenue Service. Under the 401(k) Plan, we may, but are not
obligated to, match a portion of the employee contributions up to a defined maximum. We
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Table of Contents
made matching contributions of $0.9 million, $1.1 million and $1.7 million for the years ended December 31, 2016, 2015 and
2014, respectively.
12. Stock-based Compensation Plans and Awards
Stock Incentive Plans
The 2010 Incentive Award Plan (the “2010 Plan”) was adopted by the board of directors, and approved by the Company’s
stockholders in August 2010. In connection with the adoption of the 2010 Plan on August 5, 2010, 0.06 million stock-based
awards then available for grant under the 2006 Plan were canceled. Any stock-based awards outstanding under the 2006 Plan
when the 2010 Plan was adopted that subsequently are forfeited, expire or lapse are available for future grants under the 2010
Plan. An amended and restated version of the 2010 Plan (the “2010 A&R Plan”) was adopted by the board of directors on April
23, 2015 and approved by the Company’s stockholders on June 11, 2015. Following the Separation, up to 5.6 million stock
options, restricted stock, restricted stock unit and other incentive awards were reserved for future grant to employees, officers,
non-employee directors, and consultants, and such options or awards may be designated as incentive or non-qualified and may be
granted under the 2010 A&R Plan. In addition, awards available for grant under the 2010 A&R Plan shall be increased on an
annual basis as of January 1st of each fiscal year through January 2020 by an amount equal to the lesser of (i) 1.2 million (ii) 5%
of the total shares outstanding as of the end of the prior fiscal year and (iii) such lesser amount as determined by the Administrator
of the 2010 Plan. As of December 31, 2016, 3.2 million stock-based awards were available for future grant under the 2010 Plan.
Generally, stock option grants have 10-year terms and vest either annually or monthly over a 3 or 4-year period. Restricted stock
unit awards generally vest either annually or quarterly over a 3 or 4-year period. Certain stock options and restricted stock unit
awards have accelerated vesting provisions in the event of a change in control.
Valuation of Awards
The per share fair value of stock options granted with service conditions was determined on the date of grant using the
Black-Scholes-Merton option pricing model with the following weighted average assumptions:
Expected life (in years)
Risk-free interest rate
Expected volatility range
Expected dividend yield
2016
Year ended December 31,
2015
6.00
1.32
53.6
—
% % 5.94
1.69
53.4
—
% % 2014
5.89
1.82
54.1
—
% % In addition, 1.3 million options were awarded to our chief executive officer during the quarter ended September 30, 2014.
The valuation of these options was determined on the date of grant using the Hull-White model with the following assumptions:
volatility 61%, risk-free interest rate 2.43%, early exercise multiple 2.9 years, and dividend rate 0%.
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Table of Contents
Award Activity
Stock
Options
Stock option activity is as follows (in thousands, except per share data):
Number of
Outstanding at December 31, 2015
Options granted
Options exercised
Options forfeited or cancelled
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Vested and expected to vest at December 31, 2016
options
outstanding
3,199 321 (96) (568) 2,856 1,477 2,688 Weighted average Weighted remaining average contractual exercise term
price (in years) 8.10 8.67 $
5.43 $
5.11 $
6.05 $
8.31 7.88 $
8.85 7.47 $
8.50
7.84 $
Aggregate intrinsic
value
409 $
1,489 $
566 $
1,279
$
The pretax aggregate intrinsic value of outstanding and exercisable stock options is based on the difference between the
estimated fair value of our common stock at December 31, 2016 and 2015 and their exercise prices, respectively for all awards
where the fair value of our common stock exceeds the exercise price. Options expected to vest reflect an estimated forfeiture rate.
Information related to stock-based compensation activity is as follows (in thousands, except per share data):
Weighted average fair value of options granted (per option)
Intrinsic value of options exercised
$
$
2016
Year ended December 31,
2015
2.76 $
97 $
2014
2.74 $
13 $
4.21 303 As of December 31, 2016, there was approximately $4.5 million of stock-based compensation expense related to the nonvested portion of stock options, which is expected to be recognized over a weighted average period of 1.8 years.
Restricted
Stock
Units
Number of
shares
Unvested at December 31, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2016
977 1,926 (559) (403) 1,941 6.42 5.30 6.26 5.97 5.45 Weighted
average
grant date
fair value
$
$
$
$
$
The total fair value of restricted stock units that vested in the years ended December 31, 2016, 2015 and 2014 was $3.5
million, $2.9 million and $18.3 million, respectively.
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Table of Contents
As of December 31, 2016, there was approximately $7.0 million of unrecognized stock-based compensation cost related to
non-vested RSUs. The amount is expected to be recognized over a weighted average period of 2.1 years. To the extent that the
forfeiture rate is different from that anticipated, stock-based compensation expense related to these awards will be different.
In February 2017, we granted 1.2 million restricted stock units in connection with our annual equity grants.
Employee
Stock
Purchase
Plan
In May 2011, we commenced our first offering under the Employee Stock Purchase Plan (“ESPP”), which allows eligible
employees to purchase, through payroll deductions, a limited amount of our common stock at a 15% discount to the lower of
market price as of the beginning or ending of each six-month purchase period. Participants can authorize payroll deductions for
amounts up to the lesser of 15% of their qualifying wages or the statutory limit under the U.S. Internal Revenue Code. We
previously suspended the ESPP after the November 2015 purchase after considering the benefits and participation rates in the
ESPP. We restarted offerings under the ESPP in May 2016. The ESPP currently provides for a 12-month offering period which is
comprised of two consecutive six-month purchase periods, one from May to November and the other from November to May. A
maximum of 500 shares of common stock may be purchased by each participant during each six-month purchase period. The fair
value of the ESPP options granted is determined using a Black-Scholes-Merton model and is amortized over the remaining life of
the 12-month offering period of the ESPP. The Black-Scholes-Merton model included an assumption for expected volatility of
between 32% and 48% for each of the two purchase periods in the current offering period. The expense related to the years ended
December 31, 2016, 2015 and 2014 was not material. There were 1.7 million shares of common stock remaining authorized for
issuance under the ESPP at December 31, 2016.
Stock-based Compensation Expense
Stock-based compensation expense related to all employee and non-employee stock-based awards was as follows (in
thousands):
Stock-based compensation expense related to all employee and non-employee stock-based
Year ended December 31,
awards was as follows (in thousands): 2016 2015 2014 Service costs
$ 1,174 $ 1,084 $ 1,422 691 714 Sales and marketing
725 Product development
1,502 2,192 10,476 General and administrative
4,378 3,595 6,254 Discontinued operations
— — 2,949 7,779
7,562
Total stock-based compensation
21,815 (706) Income tax benefit related to stock-based compensation included in net loss
— — $ 7,779 $ 7,562 $ 21,109 There was no income tax benefit related to stock-based compensation included in net income (loss) for the years ended
December 31, 2016 and 2015 as the Company generated current year taxable losses without stock-based compensation.
During the years ended December 31, 2016, 2015 and 2014, $0.4 million, $0.4 million and $1.0 million respectively, of
stock-based compensation expense related to stock options was capitalized, primarily as part of internally developed software
projects.
During the year ended December 31, 2016, we accelerated the vesting of certain stock awards in connection with the sale of
our Cracked business, resulting in approximately $0.8 million in stock-based compensation expense. Stock-based compensation
expense for accelerations and modifications was immaterial for the year ended December 31, 2015. During the year ended
December 31, 2014, we accelerated the vesting of certain outstanding equity instruments for three employees, resulting in the
recognition of $3.5 million of expense.
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Table of Contents
Separation
In connection with the Separation of Rightside from Leaf Group (formerly known as Demand Media) completed in the year
ended December 31, 2014, and subsequent 1-for-5 reverse stock split, all of our outstanding equity-based compensation awards
were adjusted as follows:
Stock
Options
. Immediately prior to the Separation, each stock option that had an exercise price greater than 120% of the
trading price of our common stock on the New York Stock Exchange on July 31, 2014, was adjusted by reducing the per share
exercise price and making a corresponding reduction in the number of shares of common stock subject to the stock option, so that
the value of the such stock option was approximately equal before and after such adjustment. Immediately prior to the Separation
(but following the adjustment), each stock option that was vested, or was unvested and held by an individual who was employed
or engaged by us following the Separation, was split into a Leaf Group stock option and a Rightside stock option with a combined
value that approximately equaled the value of the Leaf Group stock option immediately prior to the Separation. Unvested Leaf
Group stock options held by a Rightside employee were accelerated then split equally between Leaf Group and Rightside stock
options.
Restricted
Stock
Units
. Immediately prior to the Separation, each RSU award that was held by an individual who was
employed or engaged by us following the Separation and was granted prior to March 1, 2014, was split into a Leaf Group RSU
award and a Rightside RSU award with a combined value that approximately equaled the value of the underlying Leaf Group
RSU award immediately prior to the Separation. Each RSU award held by an individual who was employed or engaged by
Rightside or its affiliates following the Separation was converted into a Rightside RSU award covering a number of Rightside
shares such that the pre-distribution value of the pre-Separation value of the Leaf Group RSU award was approximately
preserved.
13. Stockholders’ Equity
Reverse Stock Split
On August 1, 2014, we completed the Separation of Rightside from the Company. The Separation was structured as a pro
rata tax-free dividend involving the distribution of all outstanding shares of Rightside common stock to holders of our common
stock as of the record date (the “Distribution”). Immediately following the Distribution, we enacted a 1-for-5 reverse stock split
with respect to all of our outstanding shares of common stock, which is reflected retrospectively throughout the consolidated
financial statements.
Stock Repurchases
Under our stock repurchase plan, as amended in February 2012, we are authorized to repurchase up to $50.0 million of our
common stock from time to time. During the year ended December 31, 2016, we re-initiated purchases of our common stock
under the stock repurchase plan and repurchased approximately 844,000 shares at an average price of $5.74 per share for an
aggregate amount of approximately $4.9 million. As of December 31, 2016, approximately $14.4 million remained available
under the repurchase plan. The timing and actual number of shares repurchased will depend on various factors including price,
corporate and regulatory requirements, any applicable debt covenant requirements, alternative investment opportunities and other
market conditions.
Shares repurchased by us are accounted for when the transaction is settled. As of December 31, 2016, there were
approximately 10,000 unsettled share repurchases. The par value of shares repurchased and retired is deducted from common
stock and any excess over par value is deducted from additional paid-in capital. Direct costs incurred to repurchase the shares are
included in the total cost of the shares.
Voting Rights
Each share of common stock has the right to one vote per share.
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14. Fair Value of Financial Instruments
We report certain financial assets and liabilities at their carrying amounts. The carrying amounts of our financial
instruments, which include cash and cash equivalents, accounts receivable, restricted cash, accounts payable, and accrued
liabilities approximate fair value because of their short maturities. Certain assets, including goodwill, intangible assets and other
long-lived assets are also subject to measurement at fair value on a nonrecurring basis, if they are deemed to be impaired as the
result of an impairment review.
As of December 31, 2016, we did not have any Level 1 financial assets measured at fair value. As of December 31, 2015,
Level 1 financial assets measured at fair value was $5.0 million, consisting of money market funds, which are included in cash
and cash equivalents in our consolidated balance sheet.
For the year ended December 31, 2014, due to unexpected revenue declines attributable to lower traffic and monetization
yields on certain of media websites, we lowered our future cash flow expectations. As a result of the decline in our cash flow
forecast as well as a sustained decline in our market capitalization which remained at a level below the book value of our net
assets for an extended period of time, we performed an interim assessment of impairment of the goodwill in our media reporting
unit in the third quarter of 2014. Based on our analyses, we determined that the implied fair value of goodwill was substantially
lower than the carrying value of goodwill for the media reporting unit and as a result, we determined that the implied fair value of
the goodwill in the media reporting unit was zero. Accordingly, we recorded $232.3 million for the goodwill impairment charge in
2014. These estimated fair value measurements were calculated using unobservable inputs, primarily using the income and market
approach, specifically the discounted cash flow method and market comparables, which are classified as Level 3 within the fair
value hierarchy. The amount and timing of future cash flows within those analyses was based on our most recent future cash flow
expectations, long-term strategic plans and other estimates including the amount and timing of future expected cash flows,
terminal value growth rate and the appropriate market-participant risk-adjusted discount rates.
15. Discontinued Operations
On August 1, 2014, we completed the Separation of Rightside from the Company. As a result of the Separation, the
financial results of Rightside are presented as discontinued operations in our consolidated statements of operations for the year
ended December 31, 2014. Following the Separation, the following activity in our statements of operations was reclassified from
continuing operations to discontinued operations:
Year ended December 31,
2014
107,721 Service revenue
$
92,588 Service costs
5,632 Sales and marketing
8,203 Product and development
14,819 General and administrative
4,243 Amortization of intangible assets
125,485 Total operating expenses
(17,764) Operating loss
7,017 Other income (expense), net
(10,747) Loss before income taxes
$
(461) Income tax expense
(11,208) Net loss
$
Capital expenditures for discontinued operations for the year ended December 31, 2014 was $2.7 million.
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16. Acquisitions and Dispositions
Acquisitions
We account for acquisitions of businesses using the purchase method of accounting where the cost is allocated to the
underlying net tangible and intangible assets acquired, based on their respective estimated fair values. The excess of the purchase
price over the estimated fair values of the net assets acquired is recorded as goodwill.
Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of
significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected
revenue, expenses and cash flows, weighted average cost of capital, discount rates and estimates of terminal values.
During the years ended December 31, 2016 and 2014, we acquired businesses consistent with our plan of acquiring,
consolidating and developing marketplaces properties. In addition to identifiable assets acquired in these business combinations,
our goodwill primarily derives from the ability to generate synergies across our businesses. As of December 31, 2016, our
goodwill relates entirely to our acquisition of marketplace businesses.
Year
ended
December
31,
2016
On July 7, 2016, we completed the acquisition of the entire issued share capital of Other Art Fairs Ltd, which operates as
The Other Art Fair, for consideration of £1.1 million (approximately $1.5 million) in cash, excluding deferred consideration of up
to £315,000 in cash, payable over a three year period. The Other Art Fair is a leading London-based art fair for discovering
emerging artists that currently presents fairs in London, Bristol and Sydney.
The total purchase price of the acquisition was allocated to The Other Art Fair’s tangible and intangible assets acquired and
liabilities assumed based on their estimated fair values as of July 7, 2016, the closing date of the acquisition. The excess of the
purchase price over the net assets and liabilities acquired was recorded as goodwill.
The acquisition is included in our consolidated financial statements as of the closing date of the acquisition, which was July
7, 2016. Operating income and pro forma financial information for The Other Art Fair for the years ended December 31, 2016 and
2015 were not material to our financial results.
The following table summarizes the allocation of the purchase price for The Other Art Fair (in thousands):
851 Goodwill
$
556 Trademark
207 Artist relationships
(143) Other assets and liabilities assumed
Total
$ 1,471 The trademark we acquired has an estimated useful life of five years and the artist relationships we acquired have an
estimated useful life of three years. The estimated weighted average useful life of the intangible assets we acquired in total is four
years. Goodwill is primarily derived from our ability to generate synergies with its services. The goodwill is included as part of
our marketplaces reporting unit and is not deductible for tax purposes.
Year
ended
December
31,
2014
On August 8, 2014, we acquired Saatchi Online, Inc., a Delaware corporation (“Saatchi Online”), pursuant to an Agreement
and Plan of Merger whereby Saatchi Online became a wholly owned subsidiary of Leaf Group (the “Merger”). After giving effect
to working capital adjustments as of the closing date, the purchase price consisted of approximately $4.8 million in cash after
giving effect to working capital adjustments and 1,049,959 shares of our common stock, valued at approximately $10.3 million
based on our stock price on the closing date of the Merger. Of the $1.7 million from the cash portion of the purchase price
that was placed into escrow to be applied by us towards
F-31
Table of Contents
satisfaction of post-closing indemnification obligations of the former stockholders of Saatchi Online and/or post-closing
adjustments to the purchase price, approximately $0.9 million was paid to us to cover post-closing indemnification claims and
approximately $0.2 million was released to the selling stockholders in connection with a multi-party settlement agreement and the
expiration of the post-closing indemnification period in August 2015. Approximately $0.6 million remains in the escrow account
as of December 31, 2016 to cover estimated claims related to pre-closing VAT amounts, and any remaining portion of the escrow
amount that is not required to cover the estimated pre-closing VAT amounts will be paid to the former stockholders of Saatchi
Online, Inc. upon final determination of the pre-closing VAT amounts.
The Saatchi Online acquisition is included in our consolidated financial statements as of the date of the acquisition. The
allocation of the purchase consideration, for business acquisitions made by us during the year ended December 31, 2014 is as
follows (in thousands):
Goodwill
Technology
Artist relationships
License agreement
Customer relationships
Other assets and liabilities assumed
Total
$ 10,358 2,327 1,852 419 962 (866) $ 15,052 Customer relationships have a useful life of 3 years, developed technology, and the license agreement have useful lives of 5
years, and the artist relationships have a useful life of 10 years. Goodwill, which is comprised of the excess of the purchase
consideration over the fair value of the identifiable net assets acquired, is primarily derived from assembled workforce and our
ability to generate synergies with its services. The goodwill of $10.4 million is not expected to be deductible for tax purposes.
Supplemental Pro forma Information (unaudited) Supplemental information on an unaudited pro forma basis, as if the 2014 Saatchi Online acquisition had been consummated
as of January 1, 2014, is as follows (in thousands):
Year ended December 31,
2014
174,691 Revenue
$
(272,988) Net loss
$
The unaudited pro forma supplemental information is based on estimates and assumptions which we believe are reasonable
and reflect amortization of intangible assets as a result of the acquisition. The pro forma results are not necessarily indicative of
the results that would have been realized had the acquisition been consolidated in the tables above as of January 1, 2014.
Dispositions
Year
ended
December
31,
2016
On April 12, 2016, we completed the sale of substantially all of the assets relating to our Cracked business, including the
Cracked.com humor website, to Scripps Media, Inc., a subsidiary of The E.W. Scripps Company, for a cash purchase price of
$39.0 million. A portion of the purchase price equal to $3.9 million was placed into escrow at closing to cover certain of our postclosing indemnification obligations. Any remaining portion of the escrow amount that is not subject to then-pending claims will
be paid to us in July 2017, on the 15-month anniversary of the closing date of the sale. Revenue for the Cracked business for the
2016 period through the sale date of April 12, 2016 was $1.8 million. The Cracked business had a pretax loss of $1.9 million for
2016 period through the sale date of April 12, 2016, excluding allocations for corporate costs, but including stock-based
compensation expense incurred in connection with the sale. Revenue for the Cracked business for the years ended December 31,
2015 and 2014 was $10.9 million and $9.2
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million, respectively. The Cracked business had pretax income of $3.1 million and $3.3 million for the years ended December 31,
2015 and 2014, respectively, excluding allocations for corporate costs. The sale did not meet the definition of discontinued
operations under ASC 2014-08, Reporting
Discontinued
Operations
and
Disclosures
of
Disposals
of
Components
of
an
Entity.
As a result of the sale of the Cracked business, we recognized a gain of $38.1 million, recorded in other income, net, which
included $0.6 million in net assets sold and $0.3 million in transaction costs incurred in connection with the sale.
In addition, during the year ended December 31, 2016, we sold two of our non-core media properties for total cash
consideration of $2.1 million, including $0.4 million expected to be received in the first quarter of 2017, resulting in a gain of $2.1
million, recorded in other income (expense), net.
Year
ended
December
31,
2015
In February 2015, we sold our Pluck social media business for $3.8 million in cash after working capital adjustments,
resulting in a gain of $2.1 million. During the year ended December 31, 2015, we also sold certain non-core media properties for
total consideration of $1.2 million, resulting in a gain of $1.0 million, recorded in other income (expense), net.
Year
ended
December
31,
2014
We sold our Creativebug business in July 2014 and received $10.0 million in cash, inclusive of $1.0 million held in escrow
for one year from the closing date as a holdback amount to cover indemnity claims, resulting in a gain on sale of $0.2 million,
recorded in other income, net. The holdback amount was received in 2015. We also sold our CoveritLive business in July 2014
and received $4.5 million of cash and a promissory note with a principal amount of $5.6 million, resulting in a gain on sale of $0.6
million, recorded in other income (expense), net. During the year ended December 31, 2015, we agreed to an early repayment of
the promissory note and received $5.1 million in cash, plus accrued and unpaid interest, which satisfied all amounts owed to us
under the promissory note.
17. Business Segments
We operate in one operating segment. Our chief operating decision maker (“CODM”) manages our operations on a
consolidated basis for purposes of evaluating financial performance and allocating resources. The CODM reviews separate
revenue information for our Marketplaces and Media service offerings. All other financial information is reviewed by the CODM
on a consolidated basis. All of the Company’s principal operations and assets are located in the United States.
Revenue derived from the Company’s Marketplaces and Media service offerings is as follows (in thousands): Revenue derived from the Company’s Marketplaces and
Year ended December 31,
Media is as follows (in thousands):
2016
2015
2014
66,139 $
52,155 $
35,391
Marketplaces
$
47,313 73,814 137,038
Media
113,452 $
125,969 $
172,429
Total revenue
$
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Revenue by geographic region, as determined based on the location of our customers or the anticipated destination of use
was as follows:
Year ended December 31,
Domestic
International
Total revenue
2016
2015
90,504 22,948 113,452 $
$
2014
107,258 18,711 125,969 $
$
$
$
152,437
19,992
172,429
18. Concentrations
Concentrations of Credit and Business Risk
Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents,
marketable securities and accounts receivable.
At December 31, 2016, our cash and cash equivalents and marketable securities were maintained primarily with three 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 subjects 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. A substantial portion of our advertising revenue is generated from one advertising network partner through arrangements
which are set to expire in October 2017. We may not be successful in renewing any of these agreements, or if they are renewed,
they may not be on terms as favorable as current agreements. We may not be successful in renewing our agreements with
advertising network partners on commercially acceptable terms.
The percentage of revenue generated through advertising network partners representing more than 10% of consolidated
revenue is as follows:
Google Inc.
2016
Year ended December 31,
2015
27 % 2014
36 % 50 % Advertising network partners comprising more than 10% of the consolidated accounts receivable balance was as follows:
Google Inc.
F-34
Year ended December 31,
2016
2015
35 % 26 % Table of Contents
19. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share of common stock (in
thousands, except per share data):
Year ended December 31,
2016
2015
2014
Net loss from continuing operations
$ (2,011) $ (43,501) $ (256,149) (11,208) Net loss from discontinued operations
— — Net loss
$ (2,011) $ (43,501) $ (267,357) 19,938 18,748 Weighted average common shares outstanding
20,152 Weighted average unvested restricted stock awards
(3) — — 20,152
19,938
18,745
Weighted average common shares outstanding—basic and diluted
Net loss per share
(0.10) $
(2.18) $
(13.66) Net loss from continuing operations
$
(0.60) Net loss from discontinued operations
— — (0.10)
(2.18)
(14.26)
$
$
$
Net loss per share - basic and diluted
For the years ended December 31, 2016, 2015 and 2014, we excluded 3.6 million, 4.1 million, and 4.4 million shares,
respectively, from the calculation of diluted weighted average shares outstanding, as their inclusion would have been antidilutive.
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Table of Contents
EXHIBIT INDEX
Exhibit No.
Description of Exhibit
2.1
Agreement and Plan of Merger, dated as of August 8, 2014, by and among Demand Media, Inc. (now known
as Leaf Group Ltd., the “Company”), Gallery Merger Sub, Inc., Saatchi Online, Inc. and Shareholder
Representative Services LLC (incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K filed with the SEC on August 11, 2014)
2.2
Asset Purchase Agreement, dated April 8, 2016, by and among the Company, Scripps Media, Inc., a Delaware
corporation, and, solely with respect to Section 10.15, The E.W. Scripps Company, an Ohio corporation
(incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC
on April 12, 2016)
3.1
Amended and Restated Certificate of Incorporation of Leaf Group Ltd., as amended effective November 9,
2016 (filed herewith)
3.2
Amended and Restated Bylaws of Leaf Group Ltd. (incorporated by reference to Exhibit 3.2 to the
Company’s Current Report on Form 8-K filed with the SEC on November 14, 2016)
4.1
Form of Leaf Group Ltd. Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed with the SEC on November 14, 2016)
10.1
† Form of Indemnification Agreement entered into by and between the Company and each of its directors and
executive officers (incorporated by reference to Exhibit 10.01 to Amendment No. 2 to the Company’s
Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on October 12, 2010)
10.2
† Amended and Restated Demand Media, Inc. 2006 Equity Incentive Plan, adopted April 2006 and amended
and restated on June 26, 2008 (incorporated by reference to Exhibit 10.03 to the Company’s Registration
Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.2A
† First Amendment to the Amended and Restated Demand Media, Inc. 2006 Equity Incentive Plan, dated
June 1, 2009 (incorporated by reference to Exhibit 10.03A to the Company’s Registration Statement on
Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.3
† Form of Demand Media, Inc. 2006 Equity Incentive Plan Stock Option Agreement (incorporated by reference
to Exhibit 10.07 to the Company’s Registration Statement on Form S-1 (File No. 333-168612) filed with the
SEC on August 6, 2010)
10.4
† Amended and Restated Leaf Group Ltd. 2010 Incentive Award Plan, adopted June 2015, as updated to reflect
the Company’s name change effective November 9, 2016 (filed herewith)
10.5
† Form of Leaf Group Ltd. 2010 Incentive Award Plan Stock Option Grant Notice and Stock Option
Agreement, as amended (filed herewith)
10.6
† Form of Leaf Group Ltd. 2010 Incentive Award Plan Restricted Stock Unit Award Grant Notice and
Restricted Stock Unit Award Agreement, as amended (filed herewith)
10.7
† Form of Leaf Group Ltd. 2010 Incentive Award Plan Restricted Stock Award Grant Notice and Restricted
Stock Award Agreement, as amended (filed herewith)
10.8
† Leaf Group Ltd. 2010 Employee Stock Purchase Plan, dated September 27, 2010, as updated to reflect the
Company’s name change effective November 9, 2016 (filed herewith)
10.9
† Amended and Restated Employment Agreement, dated as of January 5, 2016, by and between the Company
and Sean Moriarty (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the SEC on January 7, 2016)
10.10
† Employment Agreement between the Company and Rachel Glaser, dated as of March 4, 2015 ( incorporated
by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed with the SEC on March
16, 2015 )
Table of Contents
Exhibit No.
Description of Exhibit
10.11
† Amended and Restated Employment Agreement by and between the Company and Brian Pike, dated as of
May 21, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the SEC on May 21, 2015 )
10.12
† Employment Agreement between the Company and Dion Camp Sanders, dated as of August 1,
2016 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with
the SEC on November 7, 2016)
10.13
† Second Amended and Restated Employment Agreement between the Company and Daniel Weinrot, dated as
of December 1, 2014 ( incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form
10-K filed with the SEC on March 16, 2015 )
10.14
† Employment Agreement by and between the Company and Wendy Voong, dated as of July 28, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC
on August 3, 2015)
10.15
10.16
† Outside Director Compensation Program (updated as of February 2016) (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2016 )
10.17
Tax Matters Agreement between the Company and Rightside Group, Ltd., dated as of August 1, 2014
(incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC
on August 7, 2014)
14.1
Code of Business Conduct and Ethics (filed herewith)
21.1
List of subsidiaries of Leaf Group Ltd. (filed herewith)
23.1
Consent of Independent Registered Public Accounting Firm (filed herewith)
24.1
Power of Attorney (included on signature page hereto)
31.1
Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)
31.2
Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)
32.1
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS
XBRL Instance Document (filed herewith)
101.SCH
XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
Google Services Agreement entered into by Google Inc. and the Company, effective as of November 1, 2016
(portions of this exhibit have been omitted pursuant to a request for confidential treatment) (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the SEC on January 9,
2017)
XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
† Indicates management contract or compensatory plan, contract or arrangement.
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
LEAF GROUP LTD.
(as amended, effective as of November 9, 2016)
ONE : The corporation was incorporated on March 23, 2006 under the name Demand Media, Inc.
pursuant to the General Corporation Law of the State of Delaware (the “Delaware General Corporation Law”).
TWO : This Amended and Restated Certificate of Incorporation shall be effective as of 10:00 a.m.
Eastern Daylight Time, on January 31, 2011.
THREE : This Amended and Restated Certificate of Incorporation has been duly adopted in accordance
with the provisions of Sections 242, 245 and 228 of the Delaware General Corporation Law, and prompt written notice will
be duly given pursuant to Section 228 of the Delaware General Corporation Law.
FOUR : This Amended and Restated Certificate of Incorporation amends and restates the Restated
Certificate of Incorporation to read as follows:
ARTICLE I
The name of the corporation is Leaf Group Ltd. (the “Corporation”).
ARTICLE II
The address of the Corporation’s registered office in the State of Delaware is 1679 S. Dupont Hwy, Suite 100, in the
City of Dover, County of Kent, 19901. The name of its registered agent at such address is Registered Agent Solutions, Inc.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized
under the Delaware General Corporation Law.
ARTICLE IV
A. This Corporation is authorized to issue two classes of stock to be designated, respectively, “Common
Stock” and “Preferred Stock.” The total number of shares that the Corporation is authorized to issue is one hundred twentyfive million (125,000,000) shares, one hundred million (100,000,000) shares of which shall be Common Stock and twentyfive million (25,000,000) shares of which shall be Preferred Stock. The Common Stock shall have a par value of $0.0001 per
share and the Preferred Stock shall have a par value of $0.0001 per share.
B. Preferred Stock . Shares of preferred stock may be issued in one or more series, from time to time, with
each such series to consist of such number of shares and to have such voting powers, full or limited, or no voting powers, and
such designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or
restrictions thereof, as shall be stated in the resolution or resolutions providing for the issuance of such series adopted by the
Board of Directors of the Corporation, and the Board of Directors is hereby expressly vested with the authority, to the full
extent now or hereafter provided by law, to adopt any such resolution or resolutions. The authority of the Board of Directors
with respect to each series of preferred stock shall include, but not be limited to, determination of the following:
(1) The number of shares constituting that series and the distinctive designation of that series;
(2) The dividend rate or rates on the shares of that series, the terms and conditions upon which and
the periods in respect of which dividends shall be payable, whether dividends shall be cumulative, and, if so, from which date
or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series;
(3) Whether that series shall have voting rights, in addition to the voting rights provided by law, and,
if so, the terms of such voting rights
(4) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such
conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall
determine;
(5) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions
of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share
payable in the event of redemption, which amount may vary under different conditions and at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption or purchase of shares of that
series, and, if so, the terms and amount of such sinking fund;
(7) The rights of the shares of that series in the event of voluntary or involuntary liquidation,
distribution of assets, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of
shares of that series; and
(8) Any other relative rights, powers, and preferences, and the qualifications, limitations and
restrictions thereof, of that series.
C. The Common Stock shall have the rights, powers, qualifications and limitations, as hereinafter set forth in
this Article IV.
(1) Subject to the preferences applicable to any series of Preferred Stock outstanding at any time, the
holders of shares of Common Stock shall be entitled to receive such dividends and other distributions in cash, property or
shares of stock of the Corporation as may be declared thereon by the Board of Directors from time to time out of assets or
funds of the Corporation legally available therefor.
(2) Upon the dissolution, liquidation or winding up of the Corporation, subject to the rights, if any,
of the holders of any outstanding series of Preferred Stock, the holders of shares of Common Stock shall be entitled to receive
the assets of the Corporation available for distribution to its stockholders ratably in proportion to the number of shares held
by them.
(3) Except as required by law, each holder of Common Stock shall be entitled, with respect to each
share of Common Stock held by such holder on the applicable record date, to one vote in person or by proxy on all matters
submitted to a vote of the holders of Common Stock, including, without limitation, in connection with the election of
directors to the Board of Directors (it being understood that in respect of the election of directors, no stockholder shall be
entitled to cumulate votes on behalf of any candidate), whether voting separately as a class or otherwise. Notwithstanding the
foregoing, and except as otherwise required by law, holders of Common Stock, as such, shall not be entitled to vote on any
amendment to this Amended and Restated Certificate of Incorporation (including any Certificate of Designations relating to
any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the
holders of such affected series of Preferred Stock are entitled, either separately or together with the holders of one or more
other such series of Preferred Stock, to vote thereon pursuant to this Amended and Restated Certificate of Incorporation
(including any Certificate of Designations relating to any series of Preferred Stock) or pursuant to the Delaware General
Corporation Law.
ARTICLE V
For the management of the business and for the conduct of the affairs of the Corporation, and in further definition,
limitation and regulation of the powers of the Corporation, of its directors and of its stockholders or any class thereof, as the
case may be, it is further provided that:
A. (1) The management of the business and the conduct of the affairs of the Corporation shall be
vested in the Board of Directors. In addition to the powers and authority expressly conferred upon them by Statute or by this
Amended and Restated Certificate of Incorporation or the Bylaws of the Corporation, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. Subject to the rights
of any series of Preferred Stock then outstanding to elect additional directors under specified circumstances, the number of
directors which shall constitute the whole Board of Directors initially shall be eight, and, thereafter shall be fixed exclusively
by one or more resolutions adopted from time to time by a majority of the Board of Directors.
(2) Subject to the rights of any series of Preferred Stock then outstanding to elect additional directors
under specified circumstances, the directors shall be divided into three classes, designated as Class I, Class II and Class III, as
nearly equal in number as possible. The Board of Directors is authorized to assign members of the Board of Directors already
in office to Class I, Class II or Class III. At the first annual meeting of stockholders following the effectiveness of this
Amended and Restated Certificate of Incorporation (the “Qualifying Record Date”), the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders
following the Qualifying Record Date, the term of office of the Class II directors shall expire and Class II directors shall be
elected for a full term of three years. At the third annual meeting of stockholders following the Qualifying Record Date, the
term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At
each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the
directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article V(A), each director shall serve until his or her successor is
duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent director.
(3) Subject to the rights of the holders of any series of Preferred Stock then outstanding, the Board of
Directors or any individual director may be removed from office at any time for cause by the affirmative vote of the holders
of a majority of the voting power of all the then outstanding shares of voting stock of the Corporation entitled to vote at an
election of directors (the “Voting Stock”). For purposes of this Article V, “cause” shall mean (i) the director’s conviction
(treating a nolo contendere plea as a conviction) of a felony involving (a) moral turpitude or (b) a violation of federal or state
securities laws, but specifically excluding any conviction based entirely on vicarious liability; (ii) the director’s commission
of any material act of dishonesty resulting or intended to result in material personal gain or enrichment of such director at the
expense of the Corporation or any of its subsidiaries; (iii) the director’s fraud or intentional misrepresentation, including
falsifying use of funds and intentional misstatements made in financial statements, books, records or reports to stockholders
or governmental agencies; (iv) the director’s material violation of any agreement between the director and the Corporation;
(v) the director’s knowingly causing the Corporation to commit violations of applicable law (including by failure to act) or
(vi) the director being adjudged legally incompetent by a court of competent jurisdiction.
(4) Subject to the rights of the holders of any series of Preferred Stock then outstanding, any
vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any
newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors
determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less
than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and
until such director’s successor shall have been elected and qualified.
(5) During any period when the holders of any series of Preferred Stock have the right to elect
additional directors as provided for or fixed pursuant to the provisions of Article IV hereof, then upon commencement and for
the duration of the period during which such right continues: (i) the then otherwise total authorized number of directors of
the Corporation shall automatically be increased by such specified number of directors, and the holders of such Preferred
Stock shall be entitled to elect the additional directors so provided for or fixed pursuant to said provisions, and (ii) each such
additional director shall serve until such director’s successor shall have been duly elected and qualified, or until such
director’s right to hold such office terminates pursuant to said provisions, whichever occurs earlier, subject to his earlier
death, disqualification, resignation or removal. Except as otherwise provided by the Board of Directors in the resolution or
resolutions establishing such series, whenever the holders of any series of Preferred Stock having such right to elect
additional directors are divested of such right pursuant to the provisions of such stock, the terms of office of all such
additional directors elected by the holders of such stock, or elected to fill any vacancies resulting from the death, resignation,
disqualification or removal of such additional directors, shall forthwith terminate and the total authorized number of directors
of the Corporation shall be reduced accordingly.
B. (1) In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is
expressly authorized to make, alter or repeal the Bylaws of the Corporation by the affirmative vote of a majority of the
directors present at any regular or special meeting of the Board of Directors at which a quorum is present. Notwithstanding
the foregoing, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock
required by law, the Bylaws of the Corporation may be rescinded, altered, amended or repealed in any respect by the
affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all the thenoutstanding shares of the Voting Stock.
(2) The directors of the Corporation need not be elected by written ballot unless the Bylaws so
provide.
(3) Subject to the rights of the holders of any series of Preferred Stock then outstanding, any action
required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special
meeting of the stockholders of the Corporation, and the taking of any action by written consent of the stockholders is
specifically denied.
(4) Subject to the rights of the holders of any series of Preferred Stock then outstanding, special
meetings of the stockholders of the Corporation may be called, for any purpose or purposes, by the Board of Directors,
chairperson of the Board of Directors, chief executive officer or president (in the absence of a chief executive officer), but
such special meetings may not be called by any other person or persons.
(5) Subject to the rights of the holders of any series of Preferred Stock then outstanding, advance
notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any
meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation.
C. Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery
of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of
the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee
of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to
any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs
doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation
shall be deemed to have notice of and consented to the provisions of this Section C of Article V.
ARTICLE VI
A. To the maximum extent permitted by the Delaware General Corporation Law or any other law of the State
of Delaware, as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the Delaware General
Corporation Law is amended after approval by the stockholders of this Article VI
to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law as so
amended.
B. The Corporation may indemnify and advance expenses to, to the fullest extent permitted by law any
person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that the person, the person’s testator or intestate is or was a director, officer, employee or
agent of the Corporation or any predecessor of the Corporation, or serves or served at any other enterprise as a director,
officer, employee or agent at the request of the Corporation or any predecessor to the Corporation.
C. Neither any amendment nor repeal of this Article VI, nor the adoption of any provision of the
Corporation’s Certificate of Incorporation inconsistent with this Article VI, shall eliminate or reduce the effect of this
Article VI in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VI,
would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision.
ARTICLE VII
The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Amended and
Restated Certificate of Incorporation or any Certificate of Designation in the manner prescribed herein and by the laws of the
State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; provided , however ,
that notwithstanding any other provisions of this Amended and Restated Certificate of Incorporation or any provision of law
which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular
class or series of the Voting Stock required by law, this Amended and Restated Certificate of Incorporation or any Certificate
of Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power
of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or
repeal any or all of Section B of Article IV, Article V, Article VI or this Article VII.
Exhibit 10.4
AMENDED AND RESTATED LEAF GROUP LTD.
2010 INCENTIVE AWARD PLAN
ARTICLE 1.
PURPOSE
The purpose of the Amended and Restated Leaf Group Ltd. 2010 Incentive Award Plan (the “
Plan ”) is to promote the success and enhance the value of Leaf Group Ltd. (formerly known as
Demand Media, Inc.) (the “ Company ”) by linking the individual interests of the members of the
Board, Employees and Consultants to those of the Company’s stockholders and by providing such
individuals with an incentive for outstanding performance to generate superior returns to the
Company’s stockholders. The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of members of the Board, Employees and
Consultants upon whose judgment, interest, and special effort the successful conduct of the
Company’s operation is largely dependent. The Plan amends and restates in its entirety the Leaf
Group Ltd. 2010 Incentive Award Plan (the “ Original Plan ”).
ARTICLE 2.
DEFINITIONS AND CONSTRUCTION
Wherever the following terms are used in the Plan they shall have the meanings specified
below, unless the context clearly indicates otherwise. The singular pronoun shall include the plural
where the context so indicates.
2.1 “ Administrator ” shall mean the entity that conducts the general administration of
the Plan as provided in Article 12 hereof. With reference to the duties of the Committee under the
Plan which have been delegated to one or more persons pursuant to Section 12 .6 hereof, or which the
Board has assumed, the term “ Administrator ” shall refer to such person(s) unless the Committee or
the Board has revoked such delegation or the Board has terminated the assumption of such duties.
2.2 “ Affiliate ” shall mean any Parent or Subsidiary .
2.3 “ Applicable Accounting Standards ” shall mean Generally Accepted Accounting
Principles in the United States , International Financial Reporting Standards or such other
accounting principles or standards as may apply to the Company ’s financial statements under United
States federal securities laws from time to time.
2.4 “ Award ” shall mean an Option , a Restricted Stock Award , a Restricted Stock Unit
Award , a Performance Award , a Dividend Equivalent Award , a Deferred Stock Award , a Stock
Payment Award , a Stock Appreciation Right, an Other Incentive Award or a Performance Share
Award , which may be awarded or granted under the Plan .
2.5 “ Award Agreement ” shall mean any written notice, agreement, contract or other
instrument or document evidencing an Award , including through electronic medium, which shall
contain such terms and conditions with respect to an Award as the Administrator shall determine,
consistent with the Plan .
2.6 “ Board ” shall mean the Board of Directors of the Company .
2.7 “ Cause ” shall mean, with respect to any Participant, “Cause” as defined in such
Participant’s employment agreement with the Company if such an agreement exists and contains a
definition of Cause or, if no such agreement exists or such agreement does not contain a definition of
Cause, then Cause shall mean (i) the Participant’s unauthorized use or disclosure of confidential
information or trade secrets of the Company or any Subsidiary or any other material breach of a
written agreement between the Participant and the Company, including without limitation a material
breach of any employment or confidentiality agreement; (ii) the Participant’s indictment for, or the
entry of a plea of guilty or nolo contendere by the Participant to, a felony under the laws of the United
States or any state thereof or other foreign jurisdiction or any crime involving dishonesty or moral
turpitude; (iii) the Participant’s gross negligence or willful misconduct or the Participant’s willful or
repeated failure or refusal to substantially perform assigned duties; (iv) any act of fraud,
embezzlement, material misappropriation or dishonesty committed by the Participant against the
Company or any Subsidiary; or (v) any acts, omissions or statements by a Participant which the
Company reasonably determines to be materially detrimental or damaging to the reputation,
operations, prospects or business relations of the Company or any Subsidiary.
2.8 “ Change in Control ” shall mean the occurrence of any of the following events:
(a) The consummation of a transaction or series of transactions (other than an
offering of Shares to the general public through a registration statement filed with the Securities and
Exchange Commission ) whereby any “person” or related “group” of “persons” (as such terms are
used in Sections 13(d) and 14(d)(2) of the Exchange Act ) (other than the Company , any of its
Parents or Subsidiaries , an employee benefit plan maintained by the Company or any of its Parents or
Subsidiaries or a “person” that, prior to such transaction, directly or indirectly controls, is controlled
by, or is under common control with, the Company ) directly or indirectly acquires beneficial
ownership (within the meaning of Rule 13d-3 under the Exchange Act ) of securities of the Company
possessing more than fifty percent (50%) of the total combined voting power of the Company ’s
securities outstanding immediately after such acquisition; or
(b) During any period of two consecutive years, individuals who, at the beginning
of such period, constitute the Board together with any new director(s) (other than a
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director designated by a person who shall have entered into an agreement with the Company to effect
a transaction described in Section 2.8(a) or Section 2.8(c)) whose election by the Board or nomination
for election by the Company’s stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the two-year period or whose
election or nomination for election was previously so approved, cease for any reason to constitute a
majority thereof; or
(c) The consummation by the Company (whether directly involving the Company
or indirectly involving the Company through one or more intermediaries) of (x) a merger,
consolidation, reorganization, or business combination or (y) a sale or other disposition of all or
substantially all of the Company ’s assets in any single transaction or series of related transactions or
(z) the acquisition of assets or stock of another entity, in each case, other than a transaction:
(i) Which results in the Company ’s voting securities outstanding
immediately before the transaction continuing to represent (either by remaining outstanding or by
being converted into voting securities of the Company or the person that, as a result of the transaction,
controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of
the Company ’s assets or otherwise succeeds to the business of the Company (the Company or such
person, the “ Successor Entity ”)), directly or indirectly, at least a majority of the combined voting
power of the Successor Entity ’s outstanding voting securities immediately after the transaction, and
(ii) After which no person or group beneficially owns voting securities
representing 50% or more of the combined voting power of the Successor Entity ; provided , however ,
that no person or group shall be treated for purposes of this Section ‎2.8(c)(ii) as
beneficially owning 50% or more of the combined voting power of the Successor Entity solely as a
result of the voting power held in the Company prior to the consummation of the transaction; or
(d) The Company’s stockholders approve a liquidation or dissolution of the
Company.
Notwithstanding the foregoing, if a Change in Control constitutes a payment event with
respect to any Award which provides for the deferral of compensation that is subject to Section 409A
of the Code, to the extent required to avoid the imposition of additional taxes under Section 409A of
the Code, the transaction or event described in subsection (a), (b), (c) or (d) with respect to such
Award shall only constitute a Change in Control for purposes of the payment timing of such Award if
such transaction also constitutes a “change in control event,” as defined in Treasury Regulation
§1.409A-3(i)(5).
Consistent with the terms of this Section 2.8, the Administrator shall have full and final
authority to determine conclusively whether a Change in Control of the Company has occurred
pursuant to the above definition, the date of the occurrence of such Change in Control and any
incidental matters relating thereto.
3
2.9 “ Code ” shall mean the Internal Revenue Code of 1986 , as amended from time to
time, together with the regulations and official guidance promulgated thereunder, whether issued prior
or subsequent to the grant of any Award . 2.10 “ Committee ” shall mean the Compensation Committee of the Board , or another
committee or subcommittee of the Board described in Article 12 hereof.
2.11 “ Common Stock ” shall mean the common stock of the Company , par value
$0.0001 per share.
2.12 “ Company ” shall mean Leaf Group Ltd., a Delaware corporation.
2.13 “ Consultant ” shall mean any consultant or adviser engaged to provide services to
the Company or any Affiliate that qualifies as a consultant under the applicable rules of the Securities
and Exchange Commission for registration of shares on a Form S-8 Registration Statement or any
successor Form thereto or, prior to the Public Trading Date, under Rule 701 of the Securities Act.
2.14 “ Covered Employee ” shall mean any Employee who is, or could become, a “
covered employee ” within the meaning of Section 162(m) of the Code .
2.15 “ Deferred Stock ” shall mean a right to receive Shares awarded under Section 9.4
2.16 “ Director ” shall mean a member of the Board , as constituted from time to time.
hereof.
2.17 “ Dividend Equivalent ” shall mean a right to receive the equivalent value (in cash or
Shares ) of dividends paid on Shares , awarded under Section 9.2 hereof.
2.18 “ DRO ” shall mean a “ domestic relations order ” as defined by the Code or Title I
of the Employee Retirement Income Security Act of 1974 , as amended from time to time, or the rules
thereunder. 2.19 “ Effective Date ” shall mean, for purposes of the Plan (as amended and restated),
the date on which the Plan is approved by the Company’s stockholders; provided, however, that
solely for purposes of the last sentence of Section 13.1 hereof (regarding ISOs), the Effective Date
shall be the date on which the Plan (as amended and restated) is adopted by the Board, subject to
approval of the Plan (as amended and restated) by the Company’s stockholders. Notwithstanding the
foregoing, the Original Plan shall remain in effect on its existing terms unless and until the Plan (as
amended and restated) is approved by the Company’s stockholders.
2.20 “ Eligible Individual ” shall mean any person who is an Employee , a Consultant or
a Non-Employee Director , as determined by the Administrator .
2.21 “ Employee ” shall mean any officer or other employee (as determined in
accordance with Section 3401(c) of the Code ) of the Company or of any Affiliate .
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2.22 “ Equity Restructuring ” shall mean a nonreciprocal transaction between the
Company and its stockholders, such as a stock dividend, stock split, spin-off, rights offering or
recapitalization through a large, nonrecurring cash dividend, that affects the number or kind of shares
of Common Stock (or other securities of the Company ) or the share price of Common Stock (or other
securities) and causes a change in the per share value of the Common Stock underlying outstanding
Awards .
2.23 “ Exchange Act ” shall mean the Securities Exchange Act of 1934 , as amended
from time to time.
2.24 “ Fair Market Value ” shall mean, as of any given date, the value of a Share
determined as follows:
(a) If the Common Stock is (i) listed on any established securities exchange (such
as the New York Stock Exchange, the NASDAQ Global Market and the NASDAQ Global Select
Market ), (ii) listed on any national market system or (iii) listed, quoted or traded on any automated
quotation system, its Fair Market Value shall be the closing sales price for a share of Common Stock
as quoted on such exchange or system for such date or, if there is no closing sales price for a share of
Common Stock on the date in question, the closing sales price for a share of Common Stock on the
last preceding date for which such quotation exists, as reported in The
Wall
Street
Journal
or such
other source as the Administrator deems reliable;
(b) If the Common Stock is not listed on an established securities
exchange, national market system or automated quotation system, but the Common Stock is regularly
quoted by a recognized securities dealer, its Fair Market Value shall be the mean of the high bid and
low asked prices for such date or, if there are no high bid and low asked prices for a share of Common
Stock on such date, the high bid and low asked prices for a share of Common Stock on the last
preceding date for which such information exists, as reported in The
Wall Street Journal
or such
other source as the Administrator deems reliable; or
(c) If the Common Stock is neither listed on an established securities exchange,
national market system or automated quotation system nor regularly quoted by a recognized securities
dealer, its Fair Market Value shall be established by the Administrator in good faith.
2.25 “ Greater Than 10% Stockholder ” shall mean an individual then-owning (within
the meaning of Section 424(d) of the Code ) more than 10% of the total combined voting power of all
classes of stock of the Company or any “ parent corporation ” or “ subsidiary corporation ” (as
defined in Sections 424(e) and 424(f) of the Code, respectively ).
2.26 “ Incentive Stock Option ” shall mean an Option that is intended to qualify as an
incentive stock option and conforms to the applicable provisions of Section 422 of the Code .
2.27 “ Individual Award Limit ” shall mean the cash and share limits applicable to
Awards granted under the Plan , as set forth in Section 3.3 hereof. 2.28 Employee .
“ Non-Employee Director ” shall mean a Director of the Company who is not an
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2.29 “ Non-Qualified Stock Option ” shall mean an Option that is not an Incentive Stock
Option or which is designated as an Incentive Stock Option but does not meet the applicable
requirements of Section 422 of the Code .
2.30 “ Option ” shall mean a right to purchase Shares at a specified exercise price,
granted under Article 6 hereof. An Option shall be either a Non-Qualified Stock Option or an
Incentive Stock Option ; provided , however , that Options granted to Non-Employee Directors and
Consultants shall only be Non-Qualified Stock Options .
2.31 “ Original Plan ” shall mean the Demand Media, Inc. 2010 Incentive Award Plan.
2.32 “ Other Incentive Award ” shall mean an Award denominated in, linked to or
derived from Shares or value metrics related to Shares , granted pursuant to Section 9.7 hereof.
2.33 “ Parent ” shall mean any entity (other than the Company ), whether domestic or
foreign, in an unbroken chain of entities ending with the Company if each of the entities other than
the Company beneficially owns, at the time of the determination, securities or interests representing
more than fifty percent (50%) of the total combined voting power of all classes of securities or
interests in one of the other entities in such chain.
2.34 “ Participant ” shall mean a person who has been granted an Award .
2.35 “ Performance Award ” shall mean an Award that is granted under Section 9.1
hereof.
2.36 “ Performance-Based Compensation ” shall mean any compensation that is intended
to qualify as “performance-based compensation” as described in Section 162(m)(4)(C) of the Code .
2.37 “ Performance Criteria ” shall mean the criteria (and adjustments) that the
Committee selects for an Award for purposes of establishing the Performance Goal or Performance
Goals for a Performance Period , determined as follows:
(a) The Performance Criteria that shall be used to establish Performance Goals are
limited to the following: (i) net earnings (either before or after one or more of the following: (A)
interest, (B) taxes, (C) depreciation, (D) amortization, (E) non-cash equity-based compensation
expense and (F) other non-cash items impacting net earnings from time to time); (ii) gross or net sales
or revenue; (iii) net income (either before or after taxes); (iv) adjusted net income; (v) operating
earnings or profit; (vi) cash flow (including, but not limited to, operating cash flow, free cash flow
and discretionary free cash flow); (vii) return on assets; (viii) return on capital; (ix) return on
stockholders’ equity; (x) total stockholder return; (xi) return on sales; (xii) gross or net profit or
operating margin; (xiii) costs; (xiv) funds from operations; (xv) expenses; (xvi) working capital; (xvii)
earnings per share; (xviii) adjusted earnings per share; (xix) price per share of Common Stock ; (xx)
regulatory body approval for commercialization of a product; (xxi) implementation or completion of
critical projects or strategic transactions; (xxii) market share; (xxiii) economic value; (xxiv) customer
retention; (xxv) sales-related goals; (xxvi) transaction-related goals (including, but not limited to,
gross transaction value or average revenue per transaction); (xxvii) visitor and/or traffic metrics; and
(xxviii) customer engagement
6
metrics, any of which may be measured either in absolute terms for the Company or any operating
unit of the Company or as compared to any incremental increase or decrease or as compared to results
of a peer group or to market performance indicators or indices.
(b) The Administrator may, in its sole discretion, provide that one or more
objectively determinable adjustments shall be made to one or more of the Performance Goals . Such
adjustments may include, but are not limited to, one or more of the following: (i) items related to a
change in accounting principle; (ii) items relating to financing activities; (iii) expenses for
restructuring or productivity initiatives; (iv) other non-operating items; (v) items related to
acquisitions; (vi) items attributable to the business operations of any entity acquired by the Company
during the Performance Period ; (vii) items related to the disposal of a business or segment of a
business; (viii) items related to discontinued operations that do not qualify as a segment of a business
under Applicable Accounting Standards ; (ix) items attributable to any stock dividend, stock split,
combination or exchange of stock occurring during the Performance Period ; (x) any other items of
significant income or expense which are determined to be appropriate adjustments; (xi) items
relating to unusual or extraordinary corporate transactions, events or developments, (xii) items
related to amortization of acquired intangible assets; (xiii) items that are outside the scope of the
Company ’s core, on-going business activities; (xiv) items related to acquired in-process research and
development; (xv) items relating to changes in tax laws; (xvi) items relating to major licensing or
partnership arrangements; (xvii) items relating to asset impairment charges; (xviii) items relating to
gains or losses for litigation, arbitration and contractual settlements; or (xix) items relating to any
other unusual or nonrecurring events or changes in applicable laws, accounting principles or business
conditions. For all Awards intended to qualify as Performance-Based Compensation , such
determinations shall be made within the time prescribed by, and otherwise in compliance with,
Section 162(m) of the Code .
2.38 “ Performance Goals ” shall mean, for a Performance Period , one or more goals
established in writing by the Administrator for the Performance Period based upon one or more
Performance Criteria . Depending on the Performance Criteria used to establish such Performance
Goals , the Performance Goals may be expressed in terms of overall Company performance or the
performance of an Affiliate , division, business unit, or an individual. The achievement of each
Performance Goal shall be determined in accordance with Applicable Accounting Standards .
2.39 “ Performance Period ” shall mean one or more periods of time, which may be of
varying and overlapping durations, as the Administrator may select, over which the attainment of one
or more Performance Goals will be measured for the purpose of determining a Participant ’s right to,
and the payment of, a Performance Award .
2.40 “ Performance Share Award ” shall mean a contractual right awarded under Section
9.6 hereof to receive a number of Shares or the cash value of such number of Shares based on the
attainment of specified Performance Goals or other criteria determined by the Administrator . 2.41 “ Permitted Transferee ” shall mean, with respect to a Participant , (a) prior to the
Public Trading Date, any “family member” of the Participant, as defined under Rule 701 of the
7
Securities Act and (b) on or after the Public Trading Date, any “family member” of the Participant, as
defined under the instructions to use of the Form S-8 Registration Statement under the Securities Act,
or any other transferee specifically approved by the Administrator after taking into account any state,
federal, local or foreign tax and securities laws applicable to transferable Awards. In addition, the
Administrator, in its sole discretion, may determine to permit a Participant to transfer Incentive Stock
Options to a trust that constitutes a Permitted Transferee if, under Section 671 of the Code and
applicable state law, the Participant is considered the sole beneficial owner of the Incentive Stock
Option while it is held in the trust.
2.42 “ Plan ” shall mean this Amended and Restated Leaf Group Ltd. 2010 Incentive
Award Plan , as it may be amended from time to time.
2.43 “ Prior Plan ” shall mean the Demand Media, Inc. 2006 Equity Incentive Plan , as
may be amended from time to time.
2.44 “ Program ” shall mean any program adopted by the Administrator pursuant to the
Plan containing the terms and conditions intended to govern a specified type of Award granted under
the Plan and pursuant to which such type of Award may be granted under the Plan .
2.45 “ Public Trading Date ” shall mean the first date upon which Common Stock is
listed (or approved for listing) upon notice of issuance on any securities exchange or designated (or
approved for designation) upon notice of issuance as a national market security on an interdealer
quotation system.
2.46 “ Restricted Stock ” shall mean Common Stock awarded under Article 8 hereof that
is subject to certain restrictions and may be subject to risk of forfeiture or repurchase.
2.47 “ Restricted Stock Unit ” shall mean a contractual right awarded under Section 9.5
hereof to receive in the future a Share or the cash value of a Share .
2.48 “ Securities Act ” shall mean the Securities Act of 1933 , as amended.
2.49 “ Share Limit ” shall have the meaning provided in Section 3.1(a) hereof.
2.50 “ Shares ” shall mean shares of Common Stock .
2.51 “ Stock Appreciation Right ” shall mean a stock appreciation right granted under
Article 10 hereof.
2.52 “ Stock Payment ” shall mean a payment in the form of Shares awarded under
Section 9.3 hereof.
2.53 “ Subsidiary ” shall mean any entity (other than the Company ), whether domestic or
foreign, in an unbroken chain of entities beginning with the Company if each of the entities other than
the last entity in the unbroken chain beneficially owns, at the time of the determination, securities or
interests representing more than fifty percent (50%) of the total combined voting power of all classes
of securities or interests in one of the other entities in such chain.
8
2.54 “ Substitute Award ” shall mean an Award granted under the Plan in connection
with a corporate transaction, such as a merger, combination, consolidation or acquisition of property
or stock, in any case, upon the assumption of, or in substitution for, an outstanding equity award
previously granted by a company or other entity; provided , however , that in no event shall the term
“ Substitute Award ” be construed to refer to an award made in connection with the cancellation and
repricing of an Option or Stock Appreciation Right .
2.55 “ Termination of Service ” shall mean:
(a) As to a Consultant , the time when the engagement of a Participant as a Consultant to the
Company and its Affiliates is terminated for any reason, with or without Cause, including, without
limitation, by resignation, discharge, death or retirement, but excluding terminations where the
Consultant simultaneously commences or remains in employment or service with the Company or
any Affiliate . (b) As to a Non-Employee Director, the time when a Participant who is a Non-Employee
Director ceases to be a Director for any reason, including, without limitation, a termination by
resignation, failure to be elected, death or retirement, but excluding terminations where the Participant
simultaneously commences or remains in employment or service with the Company or any Affiliate.
(c) As to an Employee, the time when the employee-employer relationship between
a Participant and the Company and its Affiliates is terminated for any reason, including, without
limitation, a termination by resignation, discharge, death, disability or retirement; but excluding
terminations where the Participant simultaneously commences or remains in employment or service
with the Company or any Affiliate. The Administrator , in its sole discretion, shall determine the effect of all matters and questions
relating to Terminations of Service , including, without limitation, the question of whether a
Termination of Service has occurred, whether any Termination of Service resulted from a discharge
for Cause and all questions of whether particular leaves of absence constitute a Termination of Service
; provided , however , that, with respect to Incentive Stock Options , unless the Administrator
otherwise provides in the terms of any Program , Award Agreement or otherwise, a leave of
absence, change in status from an employee to an independent contractor or other change in the
employee-employer relationship shall constitute a Termination of Service only if, and to the extent
that, such leave of absence, change in status or other change interrupts employment for the purposes
of Section 422(a)(2) of the Code . For purposes of the Plan , a Participant ’s employee-employer
relationship or consultancy relationship shall be deemed to be terminated in the event that the Affiliate
employing or contracting with such Participant ceases to remain an Affiliate following any merger,
sale of stock or other corporate transaction or event (including, without limitation, a spin-off).
9
ARTICLE 3.
SHARES SUBJECT TO THE PLAN
3.1 Number of Shares .
(a) Subject to Sections 3.1(b), 13.1 and 13 .2 hereof, the aggregate number of
Shares which may be issued or transferred pursuant to Awards under the Plan shall be equal to the
sum of (i) five million six hundred forty-seven thousand eight hundred sixty-six ( 5,647,866) Shares
and (ii) any Shares underlying awards outstanding under the Prior Plan as of August 1, 2014 which,
on or after such date, terminate, expire or lapse for any reason without the delivery of Shares to the
holder thereof, and (iii) an annual increase on the first day of each year beginning in 2015 and ending
in 2020 equal to the lesser of (A) one million two hundred thousand (1,200,000) Shares, (B) five
percent (5%) of the Shares outstanding (on an as converted basis) on the last day of the immediately
preceding fiscal year, assuming the conversion of any shares of preferred stock, but excluding shares
issuable upon the exercise or payment of stock options, warrants and other equity securities with
respect to which shares have not actually been issued and (C) such smaller number of Shares as may
be determined by the Board (the “ Share Limit ”), all of which may be issued as Incentive Stock
Options, provided, however
, that notwithstanding the foregoing, Shares added to the Share Limit
pursuant to Section 3.1(a)(ii) or Section 3.1(a)(iii) shall be available for issuance as Incentive Stock
Options only to the extent that making such Shares available for issuance as Incentive Stock Options
would not cause any Incentive Stock Option to cease to qualify as such. Notwithstanding the
foregoing, to the extent permitted under applicable law and applicable stock exchange rules, Awards
that provide for the delivery of Shares subsequent to the applicable grant date may be granted in
excess of the Share Limit if such Awards provide for the forfeiture or cash settlement of such Awards
to the extent that insufficient Shares remain under the Share Limit at the time that Shares would
otherwise be issued in respect of such Award . As of August 3, 2010, no further awards may be
granted under the Prior Plan , however, any awards under the Prior Plan that are outstanding as of
August 3, 2010 shall continue to be subject to the terms and conditions of the Prior Plan .
(b) If any Award is forfeited, expires or is settled for cash (in whole or in part),
the Shares subject to such Award shall, to the extent of such forfeiture, expiration or cash settlement,
again be available for future grants of Awards under the Plan and shall be added back to the Share
Limit in the same number of Shares as were debited from the Share Limit in respect of the grant of
such Award (as may be adjusted in accordance with Section 13.2 hereof). Notwithstanding anything
to the contrary contained herein, the following Shares shall not be added back to the Share Limit and
will not be available for future grants of Awards : (i) Shares tendered by a Participant or withheld
by the Company in payment of the exercise price of an Option; (ii) Shares tendered by the Participant
or withheld by the Company to satisfy any tax withholding obligation with respect to an Award; (iii)
Shares subject to a Stock Appreciation Right that are not issued in connection with the stock
settlement of the Stock Appreciation Right on exercise thereof; and (iv) Shares purchased on the open
market with the cash proceeds from the exercise of Options . Any Shares repurchased by the
Company under Section 8.4 hereof at the same price paid by the Participant so that such shares are
returned to the Company will again be available for Awards . The payment of Dividend Equivalents
in cash in conjunction with any outstanding Awards shall not be counted against the shares available
for issuance under the Plan . 10
Notwithstanding the provisions of this Section 3.1(b) , no Shares may again be optioned, granted or
awarded if such action would cause an Incentive Stock Option to fail to qualify as an incentive stock
option under Section 422 of the Code .
(c) Substitute Awards shall not reduce the Shares authorized for grant under the
Plan. Additionally, in the event that a company acquired by the Company or any Affiliate or with
which the Company or any Affiliate combines has shares available under a pre-existing plan approved
by stockholders and not adopted in contemplation of such acquisition or combination, the shares
available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent
appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such
acquisition or combination to determine the consideration payable to the holders of common stock of
the entities party to such acquisition or combination) may be used for Awards under the Plan in the
Board’s discretion at the time of such acquisition or combination and shall not reduce the Shares
authorized for grant under the Plan; provided , however , that Awards using such available shares
shall not be made after the date awards or grants could have been made under the terms of the preexisting plan, absent the acquisition or combination, and shall only be made to individuals who were
not employed by or providing services to the Company or its Affiliates immediately prior to such
acquisition or combination.
3.2 Stock Distributed . Any Shares distributed pursuant to an Award may consist, in
whole or in part, of authorized and unissued Common Stock , treasury Common Stock or Common
Stock purchased on the open market.
3.3 Limitation on Number of Shares Subject to Awards . Notwithstanding any provision
in the Plan to the contrary, and subject to Section 13 .2 hereof, the maximum aggregate number of
Shares with respect to one or more Awards that may be granted to any one person during any calendar
year (measured from the date of any grant) shall be one million(1,000,000) and the maximum
aggregate amount of cash that may be paid in cash during any calendar year (measured from the date
of any payment) with respect to one or more Awards payable in cash shall be ten million dollars ($
10,000,000) (together, the “ Individual Award Limits ”).
ARTICLE 4.
GRANTING OF AWARDS
4.1 Participation. The Administrator may, from time to time, select from among all
Eligible Individuals , those to whom one or more Awards shall be granted and shall determine the
nature and amount of each Award , which shall not be inconsistent with the requirements of the Plan . No Eligible Individual shall have any right to be granted an Award pursuant to the Plan .
4.2 Award Agreement . Each Award shall be evidenced by an Award Agreement
stating the terms and conditions applicable to such Award , consistent with the requirements of the
Plan and any applicable Program . 11
4.3 Limitations Applicable to Section 16 Persons . Notwithstanding anything contained
herein to the contrary, with respect to any Award granted or awarded to any individual who is then
subject to Section 16 of the Exchange Act , the Plan , any applicable Program and the applicable
Award Agreement shall be subject to any additional limitations set forth in any applicable exemptive
rule under Section 16 of the Exchange Act (including Rule 16b‑3 of the Exchange Act and any
amendments thereto) that are requirements for the application of such exemptive rule, and such
additional limitations shall be deemed to be incorporated by reference into such Award to the extent
permitted by applicable law.
4.4 At-Will Service . Nothing in the Plan or in any Program or Award Agreement
hereunder shall confer upon any Participant any right to continue as an Employee , Director or
Consultant of the Company or any Affiliate , or shall interfere with or restrict in any way the rights of
the Company and any Affiliate , which rights are hereby expressly reserved, to discharge any
Participant at any time for any reason whatsoever, with or without Cause, and with or without notice,
or to terminate or change all other terms and conditions of employment or engagement, except to the
extent expressly provided otherwise in a written agreement between the Participant and the Company
or any Affiliate .
4.5 Foreign Participants . Notwithstanding any provision of the Plan to the contrary, in
order to comply with the laws in other countries in which the Company and its Affiliates operate or
have Employees , Non-Employee Directors or Consultants , or in order to comply with the
requirements of any foreign securities exchange, the Administrator , in its sole discretion, shall have
the power and authority to: (a) determine which Affiliates shall be covered by the Plan ; (b)
determine which Eligible Individuals outside the United States are eligible to participate in the Plan ; (c) modify the terms and conditions of any Award granted to Eligible Individuals outside the United
States to comply with applicable foreign laws or listing requirements of any such foreign securities
exchange; (d) establish subplans and modify exercise procedures and other terms and procedures, to
the extent such actions may be necessary or advisable (any such subplans and/or modifications shall
be attached to the Plan as appendices); provided , however , that no such subplans and/or
modifications shall increase the Share Limit or Individual Award Limits contained in Sections 3.1 and
3.3 hereof, respectively; and (e) take any action, before or after an Award is made, that it deems
advisable to obtain approval or comply with any necessary local governmental regulatory exemptions
or approvals or listing requirements of any such foreign securities exchange. Notwithstanding the
foregoing, the Administrator may not take any actions hereunder, and no Awards shall be granted,
that would violate the Code , the Exchange Act , the Securities Act , the rules of the securities
exchange or automated quotation system on which the Shares are listed, quoted or traded or any other
applicable law.
4.6 Stand-Alone and Tandem Awards . Awards granted pursuant to the Plan may, in the
sole discretion of the Administrator , be granted either alone, in addition to, or in tandem with, any
other Award granted pursuant to the Plan . Awards granted in addition to or in tandem with other
Awards may be granted either at the same time as or at a different time from the grant of such other
Awards .
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ARTICLE 5.
PROVISIONS APPLICABLE TO AWARDS INTENDED TO QUALIFY AS
PERFORMANCE-BASED COMPENSATION
5.1 Purpose . The Committee , in its sole discretion, may determine whether any Award
is intended to qualify as Performance-Based Compensation . If the Committee , in its sole discretion,
decides to grant an Award to an Eligible Individual that is intended to qualify as PerformanceBased Compensation , then the provisions of this Article 5 shall control over any contrary provision
contained in the Plan . The Administrator may in its sole discretion grant Awards to Eligible
Individuals that are based on Performance Criteria or Performance Goals but that do not satisfy the
requirements of this Article 5 and that are not intended to qualify as Performance-Based
Compensation . Unless otherwise specified by the Administrator at the time of grant, the
Performance Criteria with respect to an Award intended to be Performance-Based Compensation
payable to a Covered Employee shall be determined on the basis of Applicable Accounting Standards
. 5.2 Applicability . The grant of an Award to an Eligible Individual for a particular
Performance Period shall not require the grant of an Award to such Eligible Individual in any
subsequent Performance Period and the grant of an Award to any one Eligible Individual shall not
require the grant of an Award to any other Eligible Individual in such period or in any other period.
5.3 Procedures with Respect to Performance-Based Awards . To the extent necessary to
comply with the requirements of Section 162(m)(4)(C) of the Code , with respect to any Award which
is intended to qualify as Performance-Based Compensation , no later than ninety (90) days following
the commencement of any Performance Period or any designated fiscal period or period of service (or
such earlier time as may be required under Section 162(m) of the Code ), the Committee shall, in
writing, (a) designate one or more Eligible Individuals , (b) select the Performance Criteria
applicable to the Performance Period , (c) establish the Performance Goals and amounts of such
Awards , as applicable, which may be earned for such Performance Period based on the Performance
Criteria , and (d) specify the relationship between Performance Criteria and the Performance Goals
and the amounts of such Awards , as applicable, to be earned by each Covered Employee for such
Performance Period . Following the completion of each Performance Period , the Committee shall
certify in writing whether and the extent to which the applicable Performance Goals have been
achieved for such Performance Period . In determining the amount earned under such Awards ,
unless otherwise provided in an Award Agreement , the Committee shall have the right to reduce or
eliminate (but not to increase) the amount payable at a given level of performance to take into account
additional factors that the Committee may deem relevant, including the assessment of individual or
corporate performance for the Performance Period .
5.4 Payment of Performance-Based Awards . Unless otherwise provided in the
applicable Program or Award Agreement (and only to the extent otherwise permitted by Section
162(m)(4)(C) of the Code), the holder of an Award that is intended to qualify as Performance-Based
Compensation must be employed by the Company or an Affiliate throughout the applicable
Performance Period. Unless otherwise provided in the applicable Performance Goals , 13
Program or Award Agreement , a Participant shall be eligible to receive payment pursuant to such Awards for a Performance Period only if and to the extent the Performance Goals for such period are
achieved.
5.5 Additional Limitations . Notwithstanding any other provision of the Plan and except
as otherwise determined by the Administrator , any Award which is granted to an Eligible Individual
and is intended to qualify as Performance-Based Compensation shall be subject to any additional
limitations imposed under Section 162(m) of the Code that are requirements for qualification as
Performance-Based Compensation , and the Plan , the Program and the Award Agreement shall be
deemed amended to the extent necessary to conform to such requirements.
ARTICLE 6.
GRANTING OF OPTIONS
6.1 Granting of Options to Eligible Individuals . The Administrator is authorized to
grant Options to Eligible Individuals from time to time, in its sole discretion, on such terms and
conditions as it may determine which shall not be inconsistent with the Plan .
6.2 Qualification of Incentive Stock Options . No Incentive Stock Option shall be
granted to any person who is not an Employee of the Company or any “ parent corporation ” or “
subsidiary corporation ” of the Company (as defined in Sections 424(e) and 424(f) of the Code ,
respectively). No person who qualifies as a Greater Than 10% Stockholder may be granted an
Incentive Stock Option unless such Incentive Stock Option conforms to the applicable provisions of
Section 422 of the Code . Any Incentive Stock Option granted under the Plan may be modified by the
Administrator , with the consent of the Participant , to disqualify such Option from treatment as an “
incentive stock option ” under Section 422 of the Code . To the extent that the aggregate fair market
value of stock with respect to which “ incentive stock options ” (within the meaning of Section 422 of
the Code , but without regard to Section 422(d) of the Code ) are exercisable for the first time by a
Participant during any calendar year under the Plan and all other plans of the Company and any
Affiliate corporation thereof exceeds $100,000, the Options shall be treated as Non-Qualified Stock
Options to the extent required by Section 422 of the Code . The rule set forth in the preceding
sentence shall be applied by taking Options and other “incentive stock options” into account in the
order in which they were granted and the Fair Market Value of stock shall be determined as of the
time the respective options were granted. In addition, to the extent that any Options otherwise fail to
qualify as Incentive Stock Options , such Options shall be treated as Nonqualified Stock Options .
6.3 Option Exercise Price . Except as provided in Section 6.6 hereof, the exercise price
per Share subject to each Option shall be set by the Administrator , but shall not be less than 100% of
the Fair Market Value of a Share on the date the Option is granted (or, as to Incentive Stock Options ,
on the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code
). In addition, in the case of Incentive Stock Options granted to a Greater Than 10% Stockholder ,
such price shall not be less than 110% of the Fair Market Value of a Share on the date the Option is
granted (or the date the Option is modified, extended or renewed for purposes of Section 424(h) of the
Code ).
14
6.4 Option Term . The term of each Option shall be set by the Administrator in its sole
discretion; provided , however , that the term shall not be more than ten (10) years from the date the
Option is granted, or five (5) years from the date an Incentive Stock Option is granted to a Greater
Than 10% Stockholder . The Administrator shall determine the time period, including the time period
following a Termination of Service , during which the Participant has the right to exercise the vested
Options , which time period may not extend beyond the stated term of the Option . Except as limited
by the requirements of Section 409A or Section 422 of the Code , the Administrator may extend the
term of any outstanding Option , and may extend the time period during which vested Options may be
exercised, in connection with any Termination of Service of the Participant, and, subject to Section
13.1 hereof, may amend any other term or condition of such Option relating to such a Termination of
Service .
6.5 Option Vesting .
(a) The terms and conditions pursuant to which an Option vests in the Participant
and becomes exercisable shall be determined by the Administrator and set forth in the applicable
Award Agreement . Such vesting may be based on service with the Company or any Affiliate , any of
the Performance Criteria , or any other criteria selected by the Administrator . At any time after grant
of an Option , the Administrator may, in its sole discretion and subject to whatever terms and
conditions it selects, accelerate the vesting of the Option .
(b) No portion of an Option which is unexercisable at a Participant’s Termination
of Service shall thereafter become exercisable, except as may be otherwise provided by the
Administrator either in a Program , the applicable Award Agreement or by action of the Administrator
following the grant of the Option .
6.6 Substitute Awards . Notwithstanding the foregoing provisions of this Article 6 to
the contrary, in the case of an Option that is a Substitute Award , the price per share of the shares
subject to such Option may be less than the Fair Market Value per share on the date of grant, provided
, however, that the excess of: (a) the aggregate Fair Market Value (as of the date such Substitute
Award is granted) of the Shares subject to the Substitute Award , over (b) the aggregate exercise price
thereof does not exceed the excess of: (x) the aggregate Fair Market Value (as of the time
immediately preceding the transaction giving rise to the Substitute Award ) of the shares of the
predecessor entity that were subject to the grant assumed or substituted for by the Company , over (y)
the aggregate exercise price of such shares .
6.7 Substitution of Stock Appreciation Rights . The Administrator may provide in
an applicable Program or the applicable Award Agreement evidencing the grant of an Option that the
Administrator , in its sole discretion, shall have the right to substitute a Stock Appreciation Right for
such Option at any time prior to or upon exercise of such Option ; provided , however ,
that such
Stock Appreciation Right shall be exercisable with respect to the same number of Shares for which
such substituted Option would have been exercisable, and shall also have the same exercise price and
remaining term as the substituted Option .
15
ARTICLE 7.
EXERCISE OF OPTIONS
7.1 Partial Exercise . An exercisable Option may be exercised in whole or in
part. However, an Option shall not be exercisable with respect to fractional shares and the
Administrator may require that, by the terms of the Option , a partial exercise must be with respect to
a minimum number of shares .
7.2 Manner of Exercise . All or a portion of an exercisable Option shall be deemed
exercised upon delivery of all of the following to the Secretary of the Company , or such other person
or entity designated by the Administrator , or his, her or its office, as applicable:
(a) A written or electronic notice complying with the applicable rules established
by the Administrator stating that the Option , or a portion thereof, is exercised. The notice shall be
signed by the Participant or other person then entitled to exercise the Option or such portion of the
Option ;
(b) Such representations and documents as the Administrator , in its sole
discretion, deems necessary or advisable to effect compliance with all applicable provisions of the
Securities Act, the Exchange Act, any other federal, state or foreign securities laws or regulations, the
rules of any securities exchange or automated quotation system on which the Shares are listed, quoted
or traded or any other applicable law. The Administrator may, in its sole discretion, also take
whatever additional actions it deems appropriate to effect such compliance including, without
limitation, placing legends on share certificates and issuing stop-transfer notices to agents and
registrars;
(c) In the event that the Option shall be exercised pursuant to Section 11.3 hereof
by any person or persons other than the Participant , appropriate proof of the right of such person or
persons to exercise the Option , as determined in the sole discretion of the Administrator ; and
(d) Full payment of the exercise price and applicable withholding taxes to the
stock administrator of the Company for the Shares with respect to which the Option , or portion
thereof, is exercised, in a manner permitted by Sections 11.1 and 11.2 hereof.
7.3 Notification Regarding Disposition . The Participant shall give the Company prompt
written or electronic notice of any disposition of shares of Common Stock acquired by exercise of an
Incentive Stock Option which occurs within (a) t wo years from the date of granting (including the
date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code ) such
Option to such Participant , or (b) o ne year after the transfer of such shares to such Participant .
16
ARTICLE 8.
RESTRICTED STOCK
8.1 Award of Restricted Stock .
(a) The Administrator is authorized to grant Restricted Stock to Eligible
Individuals , and shall determine the terms and conditions, including the restrictions applicable to
each award of Restricted Stock , which terms and conditions shall not be inconsistent with the Plan ,
and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate.
(b) The Administrator shall establish the purchase price, if any, and form of
payment for Restricted Stock ; provided , however , that if a purchase price is charged, such
purchase price shall be no less than the par value of the Shares to be purchased, unless otherwise
permitted by applicable law. In all cases, legal consideration shall be required for each issuance of
Restricted Stock to the extent required by applicable law.
8.2 Rights as Stockholders . Subject to Section 8.4 hereof, upon issuance of Restricted
Stock, the Participant shall have, unless otherwise provided by the Administrator , all the rights of a
stockholder with respect to said shares , subject to the restrictions in an applicable Program or in the
applicable Award Agreement, including the right to receive dividends and other distributions paid or
made with respect to the shares ; provided , however , that, in the sole discretion of the
Administrator , any extraordinary distributions with respect to the Shares shall be subject to the
restrictions set forth in Section 8.3 hereof . In addition, any dividends paid with respect to shares of
Restricted Stock subject to performance-based vesting shall be subject to (and payable only upon the
attainment of) the same vesting conditions applicable to the underlying performance-based vesting
share of Restricted Stock.
8.3 Restrictions . All shares of Restricted Stock (including any shares received by
Participants thereof with respect to shares of Restricted Stock as a result of stock dividends, stock
splits or any other form of recapitalization) shall, in the terms of an applicable Program or in the
applicable Award Agreement , be subject to such restrictions and vesting requirements as the
Administrator shall provide. Such restrictions may include, without limitation, restrictions concerning
voting rights and transferability and such restrictions may lapse separately or in combination at such
times and pursuant to such circumstances or based on such criteria as selected by the Administrator ,
including, without limitation, criteria based on the Participant ’s duration of employment, directorship
or consultancy with the Company , the Performance Criteria, Company or Affiliate performance,
individual performance or other criteria selected by the Administrator . Restricted Stock may not be
sold or encumbered until all restrictions are terminated or expire.
8.4 Repurchase or Forfeiture of Restricted Stock . If no price was paid by the
Participant for the Restricted Stock , upon a Termination of Service, the Participant ’s rights in
unvested Restricted Stock then subject to restrictions shall lapse, and such Restricted Stock shall be
surrendered to the Company and cancelled without consideration. If a price was paid by the
Participant for the Restricted Stock , upon a Termination of Service, the Company shall have the
17
right to repurchase from the Participant the unvested Restricted Stock then-subject to restrictions at a
cash price per share equal to the price paid by the Participant for such Restricted Stock or such other
amount as may be specified in an applicable Program or the applicable Award Agreement . The
Administrator in its sole discretion may provide that, upon certain events, including without limitation
a Change in Control , the Participant ’s death, retirement or disability, any other specified Termination
of Service or any other event, the Participant ’s rights in unvested Restricted Stock shall not lapse,
such Restricted Stock shall vest and cease to be forfeitable and, if applicable, the Company cease to
have a right of repurchase.
8.5 Certificates for Restricted Stock . Restricted Stock granted pursuant to the Plan may
be evidenced in such manner as the Administrator shall determine. Certificates or book entries
evidencing shares of Restricted Stock must include an appropriate legend referring to the terms,
conditions, and restrictions applicable to such Restricted Stock , and the Company may, in it sole
discretion, retain physical possession of any stock certificate until such time as all applicable
restrictions lapse.
8.6 Section 83(b) Election . If a Participant makes an election under Section 83(b) of the
Code to be taxed with respect to the Restricted Stock as of the date of transfer of the Restricted Stock
rather than as of the date or dates upon which the Participant would otherwise be taxable under
Section 83(a) of the Code , the Participant shall be required to deliver a copy of such election to the
Company promptly after filing such election with the Internal Revenue Service .
ARTICLE 9.
PERFORMANCE AWARDS , DIVIDEND EQUIVALENTS , STOCK PAYMENTS ,
DEFERRED STOCK , RESTRICTED STOCK UNITS, PERFORMANCE SHARE
AWARDS, OTHER INCENTIVE AWARDS
9.1 Performance Awards .
(a) The Administrator is authorized to grant Performance Awards to any Eligible
Individual and to determine whether such Performance Awards shall be Performance-Based
Compensation . The value of Performance Awards may be linked to any one or more of the
Performance Criteria or other specific criteria determined by the Administrator , in each case on a
specified date or dates or over any period or periods determined by the Administrator . Performance
Awards may be paid in cash, Shares or a combination of both, as determined by the Administrator.
(b) Without limiting Section 9.1(a) hereof, the Administrator may grant
Performance Awards to any Eligible Individual in the form of a cash bonus payable upon the
attainment of objective Performance Goals , or such other criteria, whether or not objective, which are
established by the Administrator , in each case on a specified date or dates or over any period or
periods determined by the Administrator . Any such bonuses paid to a Participant which are intended
to be Performance-Based Compensation shall be based upon objectively determinable bonus formulas
established in accordance with the provisions of Article 5 hereof.
18
9.2 Dividend Equivalents .
(a) Subject to Section 9.2(b) hereof, Dividend Equivalents may be granted by the
Administrator , either alone or in tandem with another Award , based on dividends declared on the
Common Stock , to be credited as of dividend payment dates during the period between the date the
Dividend Equivalents are granted to a Participant and the date such Dividend Equivalents terminate or
expire , as determined by the Administrator . Such Dividend Equivalents shall be converted to cash
or additional shares of Common Stock by such formula and at such time and subject to such
limitations as may be determined by the Administrator . In addition, Dividend Equivalents with
respect to Shares covered by an Award shall only be paid out to the Participant at the same time or
times and to the same extent that the vesting conditions, if any, are subsequently satisfied and the
Award vests with respect to such Shares.
(b) Notwithstanding the foregoing, (i) no Dividend Equivalents shall be payable
with respect to Options or Stock Appreciation Rights, unless otherwise determined by the
Administrator and (ii) any Dividend Equivalents that may become payable with respect to Awards
subject to performance-based vesting shall be subject to (and payable only upon the attainment of) the
same vesting conditions applicable to the underlying performance-based vesting Award .
9.3 Stock Payments . The Administrator is authorized to make one or more Stock
Payments to any Eligible Individual . The number or value of shares of any Stock Payment shall be
determined by the Administrator and may be based upon one or more Performance Criteria or any
other specific criteria, including service to the Company or any Affiliate , determined by the
Administrator . Stock Payments may, but are not required to be made in lieu of base salary, bonus,
fees or other cash compensation otherwise payable to such Eligible Individual .
9.4 Deferred Stock . The Administrator is authorized to grant Deferred Stock to any
Eligible Individual . The number of shares of Deferred Stock shall be determined by the
Administrator and may be based on one or more Performance Criteria or other specific criteria,
including service to the Company or any Affiliate , as the Administrator determines, in each case on a
specified date or dates or over any period or periods determined by the Administrator, subject to
compliance with Section 409A of the Code or an exemption therefrom. Shares underlying a Deferred
Stock Award which is subject to a vesting schedule or other conditions or criteria set by the
Administrator will not be issued until those conditions have been satisfied. Unless otherwise
provided by the Administrator , a holder of Deferred Stock shall have no rights as a Company
stockholder with respect to such Deferred Stock until such time as the Award has vested and the
Shares underlying the Award have been issued to the Participant .
9.5 Restricted Stock Units . The Administrator is authorized to grant Restricted Stock
Units to any Eligible Individual . The number and terms and conditions of Restricted Stock Units
shall be determined by the Administrator . The Administrator shall specify the date or dates on which
the Restricted Stock Units shall become fully vested and nonforfeitable, and may specify such
conditions to vesting as it deems appropriate, including conditions based on one or more Performance
Criteria or other specific criteria, including service to the Company or any Affiliate , in each case on
a specified date or dates or over any period or periods, as determined by the Administrator . The
Administrator shall specify, or permit the Participant to elect, the
19
conditions and dates upon which the Shares underlying the Restricted Stock Units which shall be
issued, which dates shall not be earlier than the date as of which the Restricted Stock Units vest and
become nonforfeitable and which conditions and dates shall be subject to compliance with Section
409A of the Code or an exemption therefrom. On the distribution dates, the Company shall issue to
the Participant one unrestricted, fully transferable Share (or the Fair Market Value of one such Share
in cash) for each vested and nonforfeitable Restricted Stock Unit .
9.6 Performance Share Awards . Any Eligible Individual selected by the Administrator
may be granted one or more Performance Share Awards which shall be denominated in a number of
Shares and the vesting of which may be linked to any one or more of the Performance Criteria , other
specific performance criteria ( in each case on a specified date or dates or over any period or periods
determined by the Administrator ) and/or time-vesting or other criteria, as determined by the
Administrator .
9.7 Other Incentive Awards . The Administrator is authorized to grant Other Incentive
Awards to any Eligible Individual , which Awards may cover Shares or the right to purchase Shares
or have a value derived from the value of, or an exercise or conversion privilege at a price related to,
or that are otherwise payable in or based on, Shares , shareholder value or shareholder return, in each
case on a specified date or dates or over any period or periods determined by the Administrator .
Other Incentive Awards may be linked to any one or more of the Performance Criteria or other
specific performance criteria determined appropriate by the Administrator . 9.8 Cash Settlement . Without limiting the generality of any other provision of the Plan ,
the Administrator may provide, in an Award Agreement or subsequent to the grant of an Award , in
its discretion, that any Award may be settled in cash, Shares or a combination thereof.
9.9 Other Terms and Conditions . All applicable terms and conditions of each Award
described in this Article 9 , including without limitation, as applicable, the term, vesting and
exercise/purchase price applicable to the Award , shall be set by the Administrator in its sole
discretion, provided , however , that the value of the consideration paid by a Participant for an
Award shall not be less than the par value of a Share , unless otherwise permitted by applicable law.
9.10 Exercise upon Termination of Service . Awards described in this Article 9 are
exercisable or distributable, as applicable, only while the Participant is an Employee , Director or
Consultant , as applicable. The Administrator , however, in its sole discretion, may provide that such
Award may be exercised or distributed subsequent to a Termination of Service as provided under an
applicable Program , Award Agreement , payment deferral election and/or in certain events,
including a Change in Control , the Participant ’s death, retirement or disability or any other specified
Termination of Service .
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ARTICLE 10.
STOCK APPRECIATION RIGHTS
10.1 Grant of Stock Appreciation Rights .
(a) The Administrator is authorized to grant Stock Appreciation Rights to Eligible
Individuals from time to time, in its sole discretion, on such terms and conditions as it may determine
consistent with the Plan .
(b) A Stock Appreciation Right shall entitle the Participant (or other person
entitled to exercise the Stock Appreciation Right pursuant to the Plan ) to exercise all or a specified
portion of the Stock Appreciation Right (to the extent then exercisable pursuant to its terms) and to
receive from the Company an amount determined by multiplying the difference obtained by
subtracting the exercise price per share of the Stock Appreciation Right from the Fair Market Value
on the date of exercise of the Stock Appreciation Right by the number of Shares with respect to which
the Stock Appreciation Right shall have been exercised, subject to any limitations the Administrator
may impose. Except as described in Section 10.1(c) hereof, the exercise price per Share subject to
each Stock Appreciation Right shall be set by the Administrator , but shall not be less than 100% of
the Fair Market Value on the date the Stock Appreciation Right is granted.
(c) Notwithstanding the foregoing provisions of Section 10.1(b) hereof to the
contrary, in the case of a Stock Appreciation Right that is a Substitute Award , the price per share of
the shares subject to such Stock Appreciation Right may be less than the Fair Market Value per share
on the date of grant; provided , however , that the excess of: (a) the aggregate Fair Market Value (as
of the date such Substitute Award is granted) of the Shares subject to the Substitute Award , over (b)
the aggregate exercise price thereof does not exceed the excess of: (x) the aggregate Fair Market
Value (as of the time immediately preceding the transaction giving rise to the Substitute Award ) of
the shares of the predecessor entity that were subject to the grant assumed or substituted for by the
Company , over (y) the aggregate exercise price of such shares .
10.2 Stock Appreciation Right Vesting .
(a) The Administrator shall determine the period during which a Participant shall
vest in a Stock Appreciation Right and have the right to exercise such Stock Appreciation Right in
whole or in part. Such vesting may be based on service with the Company or any Affiliate , or any
other criteria selected by the Administrator . At any time after grant of a Stock Appreciation Right ,
the Administrator may, in its sole discretion and subject to whatever terms and conditions it selects,
accelerate the period during which a Stock Appreciation Right vests.
(b) No portion of a Stock Appreciation Right which is unexercisable at
Termination of Service shall thereafter become exercisable, except as may be otherwise provided by
the Administrator either in an applicable Program or Award Agreement or by action of the
Administrator following the grant of the Stock Appreciation Right .
10.3 Manner of Exercise . All or a portion of an exercisable Stock Appreciation Right
shall be deemed exercised upon delivery of all of the following to the stock administrator 21
of the Company , or such other person or entity designated by the Administrator , or his, her or its
office, as applicable:
(a) A written or electronic notice complying with the applicable rules established
by the Administrator stating that the Stock Appreciation Right , or a portion thereof, is exercised. The
notice shall be signed by the Participant or other person then-entitled to exercise the Stock
Appreciation Right or such portion of the Stock Appreciation Right ;
(b) Such representations and documents as the Administrator , in its sole
discretion, deems necessary or advisable to effect compliance with all applicable provisions of the
Securities Act and any other federal, state or foreign securities laws or regulations. The Administrator
may, in its sole discretion, also take whatever additional actions it deems appropriate to effect such
compliance; and
(c) In the event that the Stock Appreciation Right shall be exercised pursuant to
this Section 10.3 by any person or persons other than the Participant , appropriate proof of the right of
such person or persons to exercise the Stock Appreciation Right .
10.4 Stock Appreciation Right Term . The term of each Stock Appreciation Right shall
be set by the Administrator in its sole discretion; provided , however , that the term shall not be
more than ten (10) years from the date the Stock Appreciation Right is granted. The Administrator
shall determine the time period, including the time period following a Termination of Service , during
which the Participant has the right to exercise any vested Stock Appreciation Rights , which time
period may not extend beyond the expiration date of the Stock Appreciation Right term. Except as
limited by the requirements of Section 409A of the Code , the Administrator may extend the term of
any outstanding Stock Appreciation Right , and may extend the time period during which vested
Stock Appreciation Rights may be exercised in connection with any Termination of Service of the Participant , and, subject to Section 13.1 hereof, may amend any other term or condition of such Stock
Appreciation Right relating to such a Termination of Service .
ARTICLE 11.
ADDITIONAL TERMS OF AWARDS
11.1 Payment . The Administrator shall determine the methods by which payments by
any Participant with respect to any Awards granted under the Plan shall be made, including, without
limitation: (a) cash or check, (b) Shares (including, in the case of payment of the exercise price of an
Award , Shares issuable pursuant to the exercise of the Award ) held for such period of time as may
be required by the Administrator in order to avoid adverse accounting consequences, in each case,
having a Fair Market Value on the date of delivery equal to the aggregate payments required, (c)
delivery of a written or electronic notice that the Participant has placed a market sell order with a
broker with respect to Shares then-issuable upon exercise or vesting of an Award , and that the broker
has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the aggregate payments required; provided , however , that payment of such
proceeds is then made to the Company upon settlement of such sale, or (d) other form of legal
consideration acceptable to the Administrator . The
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Administrator shall also determine the methods by which Shares shall be delivered or deemed to be
delivered to Participants . Notwithstanding any other provision of the Plan to the contrary, no Participant who is a Director or an “ executive officer ” of the Company within the meaning of
Section 13(k) of the Exchange Act shall be permitted to make payment with respect to any Awards
granted under the Plan , or continue any extension of credit with respect to such payment with a loan
from the Company or a loan arranged by the Company in violation of Section 13(k) of the Exchange
Act .
11.2 Tax Withholding . The Company and its Affiliates shall have the authority and the
right to deduct or withhold, or require a Participant to remit to the Company or an Affiliate , an
amount sufficient to satisfy federal, state, local and foreign taxes (including the Participant ’s social
security, Medicare and any other employment tax obligation) required by law to be withheld with
respect to any taxable event concerning a Participant arising as a result of the Plan . The
Administrator may in its sole discretion and in satisfaction of the foregoing requirement allow a
Participant to elect to have the Company or an Affiliate withhold Shares otherwise issuable under an
Award (or allow the surrender of Shares ). Unless determined otherwise by the Administrator, the
number of Shares which may be so withheld or surrendered shall be limited to the number of shares
which have a Fair Market Value on the date of withholding or repurchase no greater than the
aggregate amount of such liabilities based on the minimum statutory withholding rates or federal,
state, local and foreign income tax and payroll tax purposes that are applicable to such supplemental
taxable income. The Administrator shall determine the fair market value of the Shares , consistent
with applicable provisions of the Code , for tax withholding obligations due in connection with a
broker-assisted cashless Option or Stock Appreciation Right exercise involving the sale of shares to
pay the Option or Stock Appreciation Right exercise price or any tax withholding obligation.
11.3 Transferability of Awards .
(a) Except as otherwise provided in Section 11.3(b) or (c) hereof:
(i) No Award under the Plan may be sold, pledged, assigned or transferred
in any manner other than by will or the laws of descent and distribution or, subject to the consent of
the Administrator , pursuant to a DRO, unless and until such Award has been exercised, or the shares
underlying such Award have been issued, and all restrictions applicable to such shares have lapsed;
(ii) No Award or interest or right therein shall be liable for the debts,
contracts or engagements of the Participant or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, hypothecation, encumbrance, assignment or
any other means whether such disposition be voluntary or involuntary or by operation of law by
judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including
bankruptcy) unless and until such Award has been exercised, or the Shares underlying such Award
have been issued, and all restrictions applicable to such Shares have lapsed, and any attempted
disposition of an Award prior to the satisfaction of these conditions shall be null and void and of no
effect, except to the extent that such disposition is permitted by clause (i) of this provision; and
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(iii) During the lifetime of the Participant , only the Participant may
exercise an Award (or any portion thereof) granted to him under the Plan , unless it has been disposed
of pursuant to a DRO; after the death of the Participant , any exercisable portion of an Award may,
prior to the time when such portion becomes unexercisable under the Plan or the applicable Program
or Award Agreement , be exercised by his personal representative or by any person empowered to do
so under the deceased Participant ’s will or under the then applicable laws of descent and distribution.
(b) Notwithstanding Section 11.3(a) hereof, the Administrator , in its sole
discretion, may determine to permit a Participant or a Permitted Transferee of such Participant to
transfer an Award other than an Incentive Stock Option to any one or more Permitted Transferees of
such Participant , subject to the following terms and conditions: (i) an Award transferred to a
Permitted Transferee shall not be assignable or transferable by the Permitted Transferee (other to
another Permitted Transferee of the applicable Participant) other than by will or the laws of descent
and distribution; (ii) an Award transferred to a Permitted Transferee shall continue to be subject to all
the terms and conditions of the Award as applicable to the original Participant (other than the ability
to further transfer the Award ); and (iii) the Participant (or transferring Permitted Transferee) and the
Permitted Transferee shall execute any and all documents requested by the Administrator , including
without limitation, documents to (A) confirm the status of the transferee as a Permitted Transferee , (B) satisfy any requirements for an exemption for the transfer under applicable federal, state and
foreign securities laws and (C) evidence the transfer.
(c) Notwithstanding Section 11.3(a) hereof, a Participant may, in the manner
determined by the Administrator , designate a beneficiary to exercise the rights of the Participant and
to receive any distribution with respect to any Award upon the Participant ’s death. A beneficiary,
legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject
to all terms and conditions of the Plan and any Program or Award Agreement applicable to the Participant , except to the extent the Plan , the Program and the Award Agreement otherwise provide,
and to any additional restrictions deemed necessary or appropriate by the Administrator . If the Participant is married or a domestic partner in a domestic partnership qualified under applicable law
and resides in a “community property” state, a designation of a person other than the Participant ’s
spouse or domestic partner, as applicable, as his or her beneficiary with respect to more than 50% of
the Participant ’s interest in the Award shall not be effective without the prior written or electronic
consent of the Participant ’s spouse or domestic partner. If no beneficiary has been designated or
survives the Participant , payment shall be made to the person entitled thereto pursuant to the Participant ’s will or the laws of descent and distribution. Subject to the foregoing, a beneficiary
designation may be changed or revoked by a Participant at any time provided the change or
revocation is filed with the Administrator prior to the Participant ’s death.
11.4 Conditions to Issuance of Shares .
(a) Notwithstanding anything herein to the contrary, neither the Company nor its
Affiliates shall be required to issue or deliver any certificates or make any book entries evidencing
Shares pursuant to the exercise of any Award, unless and until the Administrator has determined, with
advice of counsel, that the issuance of such Shares is in compliance with all
24
applicable laws, regulations of governmental authorities and, if applicable, the requirements of any
exchange on which the Shares are listed or traded, and the Shares are covered by an effective
registration statement or applicable exemption from registration. In addition to the terms and
conditions provided herein, the Administrator may require that a Participant make such reasonable
covenants, agreements, and representations as the Administrator , in its discretion, deems advisable in
order to comply with any such laws, regulations, or requirements.
(b) All Share certificates delivered pursuant to the Plan and all shares issued
pursuant to book entry procedures are subject to any stop-transfer orders and other restrictions as the
Administrator deems necessary or advisable to comply with federal, state, or foreign securities or
other laws, rules and regulations and the rules of any securities exchange or automated quotation
system on which the Shares are listed, quoted, or traded . The Administrator may place legends on
any Share certificate or book entry to reference restrictions applicable to the Shares .
(c) The Administrator shall have the right to require any Participant to comply
with any timing or other restrictions with respect to the settlement, distribution or exercise of any
Award , including a window-period limitation, as may be imposed in the sole discretion of the
Administrator .
(d) No fractional Shares shall be issued and the Administrator shall determine, in
its sole discretion, whether cash shall be given in lieu of fractional shares or whether such fractional
shares shall be eliminated by rounding down.
(e) Notwithstanding any other provision of the Plan , unless otherwise determined
by the Administrator or required by any applicable law, rule or regulation, the Company and/or its
Affiliates may, in lieu of delivering to any Participant certificates evidencing Shares issued in
connection with any Award , record the issuance of Shares in the books of the Company (or, as
applicable, its transfer agent or stock plan administrator ).
11.5 Forfeiture Provisions . Pursuant to its general authority to determine the terms and
conditions applicable to Awards under the Plan , the Administrator shall have the right to provide, in
the terms of Awards made under the Plan , or to require a Participant to agree by separate written or
electronic instrument, that: (a)(i) any proceeds, gains or other economic benefit actually or
constructively received by the Participant upon any receipt or exercise of the Award , or upon the
receipt or resale of any Shares underlying the Award , must be paid to the Company , and (ii) the
Award shall terminate and any unexercised portion of the Award (whether or not vested) shall be
forfeited, if (b)(i) a Termination of Service occurs prior to a specified date, or within a specified time
period following receipt or exercise of the Award , or (ii) the Participant at any time, or during a
specified time period, engages in any activity in competition with the Company , or which is inimical,
contrary or harmful to the interests of the Company , as further defined by the Administrator or (iii)
the Participant incurs a Termination of Service for Cause.
11.6 Prohibition on Repricing . The Administrator shall not, without the approval of the
stockholders of the Company, (a) authorize the amendment of any outstanding Option or Stock
Appreciation Right to reduce its price per share, or (b) cancel any Option or Stock
25
Appreciation Right in exchange for cash or another Award when the Option or Stock Appreciation
Right price per share exceeds the Fair Market Value of the underlying Shares.
ARTICLE 12.
ADMINISTRATION
12.1 Administrator . The Committee (or another committee or a subcommittee of the
Board assuming the functions of the Committee under the Plan ) shall administer the Plan (except as
otherwise permitted herein) and, unless otherwise determined by the Board , shall consist solely of
two or more Non-Employee Directors appointed by and holding office at the pleasure of the Board ,
each of whom is intended to qualify as a “ non-employee director ” as defined by Rule 16b-3 of the
Exchange Act , an “outside director” for purposes of Section 162(m) of the Code and an
“independent director” under the rules of any securities exchange or automated quotation system on
which the Shares are listed, quoted or traded, in each case, to the extent required under such provision
; provided , however , that any action taken by the Committee shall be valid and effective, whether
or not members of the Committee at the time of such action are later determined not to have satisfied
the requirements for membership set forth in this Section 12 .l or otherwise provided in any charter of
the Committee . Except as may otherwise be provided in any charter of the Committee , appointment
of Committee members shall be effective upon acceptance of appointment. Committee members may
resign at any time by delivering written or electronic notice to the Board . Vacancies in the
Committee may only be filled by the Board . Notwithstanding the foregoing, (a) the full Board ,
acting by a majority of its members in office, shall conduct the general administration of the Plan with
respect to Awards granted to Non-Employee Directors and (b) the Board or Committee may delegate
its authority hereunder to the extent permitted by Section 12 .6 hereof.
12.2 Duties and Powers of Administrator . It shall be the duty of the Administrator to
conduct the general administration of the Plan in accordance with its provisions. The Administrator
shall have the power to interpret the Plan and all Programs and Award Agreements , and to adopt such
rules for the administration, interpretation and application of the Plan and any Program as are not
inconsistent with the Plan , to interpret, amend or revoke any such rules and to amend any Program or
Award Agreement provided that the rights or obligations of the holder of the Award that is the subject
of any such Program or Award Agreement are not affected adversely by such amendment, unless the
consent of the Participant is obtained or such amendment is otherwise permitted under Section 13 .10
hereof. Any such grant or award under the Plan need not be the same with respect to each Participant
. Any such interpretations and rules with respect to Incentive Stock Options shall be consistent with
the provisions of Section 422 of the Code . In its sole discretion, the Board may at any time and from
time to time exercise any and all rights and duties of the Committee under the Plan except with
respect to matters which under Rule 16b‑3 under the Exchange Act, Section 162(m) of the Code , or
the rules of any securities exchange or automated quotation system on which the Shares are listed,
quoted or traded are required to be determined in the sole discretion of the Committee .
26
12.3 Action by the Committee . Unless otherwise established by the Board or in any
charter of the Committee , a majority of the Committee shall constitute a quorum and the acts of a
majority of the members present at any meeting at which a quorum is present, and acts approved in
writing by all members of the Committee in lieu of a meeting, shall be deemed the acts of the
Committee . Each member of the Committee is entitled to, in good faith, rely or act upon any report
or other information furnished to that member by any officer or other employee of the Company or
any Affiliate , the Company ’s independent certified public accountants, or any executive
compensation consultant or other professional retained by the Company to assist in the administration
of the Plan .
12.4 Authority of Administrator . Subject to any specific designation in the Plan , the
Administrator has the exclusive power, authority and sole discretion to:
(a) Designate Eligible Individuals to receive Awards ;
(b) Determine the type or types of Awards to be granted to each Eligible
Individual ;
(c) Determine the number of Awards to be granted and the number of Shares
to which an Award will relate;
(d) Determine the terms and conditions of any Award granted pursuant to the
Plan , including, but not limited to, the exercise price, grant price, or purchase price, any
performance criteria , any restrictions or limitations on the Award , any schedule for vesting,
lapse of forfeiture restrictions or restrictions on the exercisability of an Award , and accelerations
or waivers thereof, and any provisions related to non-competition and recapture of gain on an
Award , based in each case on such considerations as the Administrator in its sole discretion
determines;
(e) Determine whether, to what extent, and pursuant to what circumstances an
Award may be settled in, or the exercise price of an Award may be paid in cash, Shares , other
Awards , or other property, or an Award may be canceled, forfeited, or surrendered;
(f) Prescribe the form of each Award Agreement , which need not be
identical for each Participant ;
(g) Decide all other matters that must be determined in connection with an
Award ;
(h) Establish, adopt, or revise any rules and regulations as it may deem
necessary or advisable to administer the Plan ;
(i) Interpret the terms of, and any matter arising pursuant to, the Plan , any
Program or any Award Agreement ; and
27
(j) Make all other decisions and determinations that may be required
pursuant to the Plan or as the Administrator deems necessary or advisable to administer the Plan .
12.5 Decisions Binding . The Administrator ’s interpretation of the Plan , any Awards
granted pursuant to the Plan , any Program , any Award Agreement and all decisions and
determinations by the Administrator with respect to the Plan are final, binding, and conclusive on all
parties.
12.6 Delegation of Authority . To the extent permitted by applicable law or the rules of
any securities exchange or automated quotation system on which the Shares are listed, quoted or
traded , the Board or Committee may from time to time delegate to a committee of one or more
members of the Board or one or more officers of the Company the authority to grant or amend
Awards or to take other administrative actions pursuant to this Article 12 ; provided , however ,
that in no event shall an officer of the Company be delegated the authority to grant awards to, or
amend awards held by, the following individuals: (a) individuals who are subject to Section 16 of the
Exchange Act , (b) Covered Employees with respect to Awards intended to constitute PerformanceBased Compensation , or (c) officers of the Company (or Directors ) to whom authority to grant or
amend Awards has been delegated hereunder; provided further , that any delegation of
administrative authority shall only be permitted to the extent it is permissible under Section 162(m) of
the Code and applicable securities laws or the rules of any securities exchange or automated quotation
system on which the Shares are listed, quoted or traded . Any delegation hereunder shall be subject to
the restrictions and limits that the Board or Committee specifies at the time of such delegation, and
the Board may at any time rescind the authority so delegated or appoint a new delegatee. At all times,
the delegatee appointed under this Section 12 .6 shall serve in such capacity at the pleasure of the
Board and the Committee .
ARTICLE 13.
MISCELLANEOUS PROVISIONS
13.1 Amendment, Suspension or Termination of the Plan . Except as otherwise provided
in this Section 13 .1 , the Plan may be wholly or partially amended or otherwise modified, suspended
or terminated at any time or from time to time by the Board . However, without approval of the
Company ’s stockholders given within twelve (12) months before or after the action by the
Administrator , no action of the Administrator may, except as provided in Section 13 .2 hereof, (a)
increase the Share Limit or increase the Individual Award Limits, (b) reduce the price per share of any
outstanding Option or Stock Appreciation Right granted under the Plan or (c) cancel any Option or
Stock Appreciation Right in exchange for cash or another Award when the Option or Stock
Appreciation Right price per share exceeds the Fair Market Value of the underlying Shares . Except
as provided in Section 13 .10 hereof, no amendment, suspension or termination of the Plan shall,
without the consent of the Participant , impair any rights or obligations under any Award theretofore
granted or awarded, unless the Award itself otherwise expressly so provides. No Awards may be
granted or awarded during any period of suspension or after termination of the Plan. The annual
increase to the Share Limit (set forth in Section 3.1(a)(iii) hereof) shall terminate on August 3, 2020
and, from and after such date, no additional share increases shall occur pursuant to Section 3.1(a)(iii)
hereof . In addition,
28
notwithstanding anything herein to the contrary, no ISO shall be granted under the Plan after the tenth
anniversary of the Effective Date.
13.2 Changes in Common Stock or Assets of the Company , Acquisition or Liquidation
of the Company and Other Corporate Events .
(a) In the event of any stock dividend, stock split, combination or exchange of
shares , merger, consolidation or other distribution (other than normal cash dividends) of Company
assets to stockholders, or any other change affecting the shares of the Company ’s stock or the share
price of the Company ’s stock other than an Equity Restructuring , the Administrator shall make
equitable adjustments, if any, to reflect such change with respect to (i) the aggregate number and kind
of shares that may be issued under the Plan (including, but not limited to, adjustments of the Share
Limit and Individual Award Limits ); (ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Awards ; (iii) the terms and conditions of any
outstanding Awards (including, without limitation, any applicable performance targets or criteria with
respect thereto); and/or (iv) the grant or exercise price per share for any outstanding Awards under
the Plan . Any adjustment affecting an Award intended as Performance-Based Compensation shall be
made consistent with the requirements of Section 162(m) of the Code unless otherwise determined by
the Administrator .
(b) In the event of any transaction or event described in Section 13 .2(a) hereof or
any unusual or nonrecurring transactions or events affecting the Company , any Affiliate of the
Company , or the financial statements of the Company or any Affiliate , or of changes in applicable
laws, regulations or accounting principles, the Administrator , in its sole discretion, and on such terms
and conditions as it deems appropriate, either by the terms of the Award or by action taken prior to the
occurrence of such transaction or event and either automatically or upon the Participant ’s request, is
hereby authorized to take any one or more of the following actions whenever the Administrator
determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect to any Award under the
Plan , to facilitate such transactions or events or to give effect to such changes in laws, regulations or
principles:
(i) To provide for either (A) termination of any such Award in exchange
for an amount of cash, if any, equal to the amount that would have been attained upon the exercise of
such Award or realization of the Participant ’s rights (and, for the avoidance of doubt, if as of the date
of the occurrence of the transaction or event described in this Section 13 .2 , the Administrator
determines in good faith that no amount would have been attained upon the exercise of such Award or
realization of the Participant ’s rights, then such Award may be terminated by the Company without
payment) or (B) the replacement of such Award with other rights or property selected by the
Administrator in its sole discretion having an aggregate value not exceeding the amount that could
have been attained upon the exercise of such Award or realization of the Participant ’s rights had
such Award been currently exercisable or payable or fully vested;
(ii) To provide that such Award be assumed by the successor or survivor
corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or
awards covering the stock of the successor or survivor corporation, or a parent
29
or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices;
(iii) To make adjustments in the number and type of securities subject to
outstanding Awards and Awards which may be granted in the future and/or in the terms, conditions
and criteria included in such Awards (including the grant or exercise price, as applicable); (iv) To provide that such Award shall be exercisable or payable or fully
vested with respect to all securities covered thereby, notwithstanding anything to the contrary in the
Plan or an applicable Program or Award Agreement ; and
(v) To provide that the Award cannot vest, be exercised or become payable
after such event.
(c) In connection with the occurrence of any Equity Restructuring , and
notwithstanding anything to the contrary in Sections 13.2(a) and 13.2(b) hereof:
(i) The number and type of securities subject to each outstanding Award
and/or the exercise price or grant price thereof, if applicable, shall be equitably adjusted. The
adjustment provided under this Section 13.2(c)(i) shall be nondiscretionary and shall be final and
binding on the affected Participant and the Company.
(ii) The Administrator shall make such equitable adjustments, if any, as
the Administrator in its discretion may deem appropriate to reflect such Equity Restructuring with
respect to the aggregate number and kind of shares that may be issued under the Plan (including, but
not limited to, adjustments to the Share Limit and the Individual Award Limits ). The adjustments
provided under this Section 13 .2(c) shall be nondiscretionary and shall be final and binding on the
affected Participant and the Company .
(d) Change in Control.
(i) Notwithstanding any other provision of the Plan , in the event of a
Change in Control , each outstanding Award shall be assumed or an equivalent Award substituted by
the successor corporation or a parent or subsidiary of the successor corporation. For the purposes of
this Section 13 .2(d)(i) , an Award shall be considered assumed or substituted if, following the
Change in Control , the assumed or substituted Award confers the right to purchase or receive, for
each share of Common Stock subject to the Award immediately prior to the Change in Control , the
consideration (whether stock, cash, or other securities or property) received in the Change in Control
by holders of Common Stock for each Share held on the effective date of the transaction (and if
holders were offered a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding shares ); provided , however , that if such consideration received in the
Change in Control was not solely common stock of the successor corporation or its parent , the
Administrator may, with the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the assumed or substituted Award , for each share of Common Stock
subject to such Award , to be solely common stock of the successor corporation or its parent equal in
fair market value to the per share consideration received by holders of Common Stock in the Change
in Control . 30
(ii) In the event that the successor corporation in a Change in Control and
its parents and subsidiaries refuse to assume or substitute for any Award in accordance with Section
13 .2(d)(i) hereof, each such non-assumed/substituted Award shall become fully vested and, as
applicable, exercisable and shall be deemed exercised, immediately prior to the consummation of such
transaction, and all forfeiture restrictions on any or all such Awards shall lapse at such time. If an
Award vests and, as applicable, is exercised in lieu of assumption or substitution in connection with a
Change in Control , the Administrator shall notify the Participant of such vesting and any applicable
exercise , and the Award shall terminate upon the Change in Control . For the avoidance of doubt, if
the value of an Award that is terminated in connection with this Section 13 .2(d)(ii) is zero or
negative at the time of such Change in Control , such Award shall be terminated upon the Change in
Control without payment of consideration therefor.
(e) The Administrator may, in its sole discretion, include such further provisions
and limitations in any Award , agreement or certificate, as it may deem equitable and in the best
interests of the Company that are not inconsistent with the provisions of the Plan .
(f) With respect to Awards which are granted to Covered Employees and are
intended to qualify as Performance-Based Compensation , no adjustment or action described in this
Section 13 .2 or in any other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause such Award to fail to so qualify as Performance-Based
Compensation , unless the Administrator determines that the Award should not so qualify. No
adjustment or action described in this Section 13 .2 or in any other provision of the Plan shall be
authorized to the extent that such adjustment or action would cause the Plan to violate Section 422(b)
(1) of the Code . Furthermore, no such adjustment or action shall be authorized with respect to any
Award to the extent such adjustment or action would result in short-swing profits liability under
Section 16 or violate the exemptive conditions of Rule 16b-3 unless the Administrator determines that
the Award is not to comply with such exemptive conditions.
(g) The existence of the Plan , the Program , the Award Agreement and the
Awards granted hereunder shall not affect or restrict in any way the right or power of the Company or
the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization
or other change in the Company ’s capital structure or its business, any merger or consolidation of the
Company , any issue of stock or of options, warrants or rights to purchase stock or of bonds,
debentures, preferred or prior preference stocks whose rights are superior to or affect the Common
Stock or the rights thereof or which are convertible into or exchangeable for Common Stock , or the
dissolution or liquidation of the Company , or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar character or otherwise.
(h) No action shall be taken under this Section 13 .2 which shall cause an Award
to fail to comply with Section 409A of the Code or an exemption therefrom, in either case, to the
extent applicable to such Award, unless the Administrator determines any such adjustments to be
appropriate.
(i) In the event of any pending stock dividend, stock split, combination or
exchange of shares , merger, consolidation or other distribution (other than normal cash
31
dividends) of Company assets to stockholders, or any other change affecting the shares of Common
Stock or the share price of the Common Stock including any Equity Restructuring , for reasons of
administrative convenience, the Company in its sole discretion may refuse to permit the exercise of
any Award during a period of thirty (30) days prior to the consummation of any such transaction.
13.3 Approval of Plan by Stockholders . The Original Plan was approved by the
Company’s stockholders on August 5, 2010. The Plan (as amended and restated) will be submitted
for the approval of the Company’s stockholders within twelve (12) months after the date of the
Board’s initial adoption of the Plan (as amended and restated). Awards may be granted or awarded
under the Plan (as amended and restated) and subject to the terms and conditions of the Original Plan
following the Board’s adoption of the Plan (as amended and restated) unless and until the Plan (as
amended and restated) receives stockholder approval. Awards granted from and after stockholder
approval of the Plan (as amended and restated) will be subject to the terms and conditions of the Plan
(as amended and restated). If the Plan (as amended and restated) is not approved by stockholders
within twelve (12) months after its adoption by the Board, then the Original Plan shall continue on its
existing terms and conditions and the Plan (as amended and restated) shall be of no force or effect. . 13.4 No Stockholders Rights . Except as otherwise provided herein or in an Award
Agreement , a Participant shall have none of the rights of a stockholder with respect to shares of
Common Stock covered by any Award until the Participant becomes the record owner of such shares
of Common Stock .
13.5 Paperless Administration . In the event that the Company establishes, for itself or
using the services of a third party, an automated system for the documentation, granting or exercise of
Awards , such as a system using an internet website or interactive voice response, then the paperless
documentation, granting or exercise of Awards by a Participant may be permitted through the use of
such an automated system.
13.6 Effect of Plan upon Other Compensation Plans . The adoption of the Plan shall not
affect any other compensation or incentive plans in effect for the Company or any Affiliate . Nothing
in the Plan shall be construed to limit the right of the Company or any Affiliate : (a) to establish any
other forms of incentives or compensation for Employees , Directors or Consultants of the Company
or any Affiliate , or (b) to grant or assume options or other rights or awards otherwise than under the
Plan in connection with any proper corporate purpose including without limitation, the grant or
assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, partnership, limited liability company ,
firm or association.
13.7 Compliance with Laws . The Plan , the granting and vesting of Awards under the
Plan and the issuance and delivery of Shares and the payment of money under the Plan or under
Awards granted or awarded hereunder are subject to compliance with all applicable federal, state,
local and foreign laws, rules and regulations (including but not limited to state, federal and foreign
securities law and margin requirements), the rules of any securities exchange or automated quotation
system on which the Shares are listed, quoted or traded , and to such approvals by any listing,
regulatory or governmental authority as may, in the opinion of counsel
32
for the Company , be necessary or advisable in connection therewith. Any securities delivered under
the Plan shall be subject to such restrictions, and the person acquiring such securities shall, if
requested by the Company , provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all applicable legal
requirements. To the extent permitted by applicable law, the Plan and Awards granted or awarded
hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and
regulations.
13.8 Titles and Headings, References to Sections of the Code or Exchange Act . The
titles and headings of the sections in the Plan are for convenience of reference only and, in the event
of any conflict, the text of the Plan , rather than such titles or headings, shall control. References to
sections of the Code or the Exchange Act shall include any amendment or successor thereto .
13.9 Governing Law . The Plan and any agreements hereunder shall be administered,
interpreted and enforced under the internal laws of the State of Delaware without regard to conflicts
of laws thereof.
13.10 Section 409A . To the extent that the Administrator determines that any Award
granted under the Plan is subject to Section 409A of the Code , the Plan , any applicable Program and
the Award Agreement covering such Award shall be interpreted in accordance with Section 409A of
the Code . Notwithstanding any provision of the Plan to the contrary, in the event that, following the
Effective Date , the Administrator determines that any Award may be subject to Section 409A of the
Code , the Administrator may adopt such amendments to the Plan , any applicable Program and the
Award Agreement or adopt other policies and procedures (including amendments, policies and
procedures with retroactive effect), or take any other actions, that the Administrator determines are
necessary or appropriate to avoid the imposition of taxes on the Award under Section 409A of the
Code, either through compliance with the requirements of Section 409A of the Code or with an
available exemption therefrom.
13.11 No Rights to Awards . No Eligible Individual or other person shall have any claim
to be granted any Award pursuant to the Plan , and neither the Company nor the Administrator is
obligated to treat Eligible Individuals , Participants or any other persons uniformly.
13.12 Unfunded Status of Awards . The Plan is intended to be an “unfunded” plan for
incentive compensation. With respect to any payments not yet made to a Participant pursuant to an
Award , nothing contained in the Plan or any Program or Award Agreement shall give the Participant
any rights that are greater than those of a general creditor of the Company or any Affiliate .
13.13 Indemnification . To the extent allowable pursuant to applicable law, each member
of the Board and any officer or other employee to whom authority to administer any component of the
Plan is delegated shall be indemnified and held harmless by the Company from any loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by such member in connection
with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in
which he or she may be involved by reason of any action or failure to
33
act pursuant to the Plan and against and from any and all amounts paid by him or her in satisfaction of
judgment in such action, suit, or proceeding against him or her; provided , however , that he or she
gives the Company an opportunity, at its own expense, to handle and defend the same before he or she
undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification
shall not be exclusive of any other rights of indemnification to which such persons may be entitled
pursuant to the Company’s Certificate of Incorporation or Bylaws , as a matter of law, or otherwise, or
any power that the Company may have to indemnify them or hold them harmless.
13.14 Relationship to other Benefits . No payment pursuant to the Plan shall be taken into
account in determining any benefits under any pension, retirement, savings, profit sharing, group
insurance, welfare or other benefit plan of the Company or any Affiliate except to the extent
otherwise expressly provided in writing in such other plan or an agreement thereunder.
13.15 Expenses . The expenses of administering the Plan shall be borne by the Company
and its Affiliates .
[ signature
page
follows
]
34
* * * * *
I hereby certify that the foregoing Plan (as amended and restated) was duly adopted by the Board of
Directors of Demand Media, Inc. (n/k/a Leaf Group Ltd.) on April 23, 2015.
* * * * *
I hereby certify that the foregoing Plan (as amended and restated) was approved by the stockholders
of Demand Media, Inc. (n/k/a Leaf Group Ltd.) on June 11, 2015.
* * * * *
I hereby certify that the Board of Directors of Demand Media, Inc. (n/k/a Leaf Group Ltd.) approved
updates to the foregoing Plan (as amended and restated) in order to reflect the corporate name change
to Leaf Group Ltd. on October 24 2016.
Executed on this 9th th day of November, 2016.
/s/ DANIEL WEINROT
Daniel Weinrot
EVP Legal, General Counsel and Secretary
35
Exhibit 10.5
LEAF GROUP LTD.
AMENDED & RESTATED 2010 INCENTIVE AWARD PLAN
STOCK OPTION GRANT NOTICE AND
STOCK OPTION AGREEMENT
Leaf Group Ltd., a Delaware corporation (the “ Company
”), pursuant to its Amended & Restated
2010 Incentive Award Plan, as further amended from time to time (the “ Plan
”), hereby grants to the
individual listed below (the “ Optionee
”) an option to purchase the number of shares of the common stock
of the Company (“ Common
Stock
”) set forth below (the “ Option
”). This Option is subject to all of the
terms and conditions set forth herein and in the Stock Option Agreement attached hereto as Exhibit A (the “
Stock Option Agreement
”) and the Plan, which are incorporated herein by reference. Unless otherwise
defined herein, the terms defined in the Plan shall have the same defined meanings in this Grant Notice and
the Stock Option Agreement. Optionee:
_______________
Grant Date:
_______________
Initial Vest Date:
_______________
Exercise Price per Share:
$______ per Share
Total Number of Shares Subject to the
Option:
_________ Shares Expiration Date:
_______________
Type of Option: Incentive Stock Option Non-Qualified Stock Option
Vesting Schedule: ____________________
To the extent that the vesting schedule would result in the vesting of any fractional
stock option, such fractional stock option shall remain unvested unless and until the
occurrence of a subsequent vesting date on which the sum of all such fractional
stock options that would otherwise have vested on or prior to such subsequent
vesting date equals a whole stock option, at which time the whole stock option shall
vest (subject to the grantee’s continued service through such date).
Termination: The Option shall terminate on the Expiration Date set forth above or, if earlier, in
accordance with the terms of the Stock Option Agreement.
By his or her electronic signature, the Optionee agrees to be bound by the terms and conditions of the
Plan, the Stock Option Agreement and this Grant Notice. The Optionee has reviewed the Stock Option
Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of
counsel prior to accepting this Grant Notice and fully understands all provisions of this Grant Notice, the
Stock Option Agreement and the Plan. The Optionee hereby agrees to accept as binding, conclusive and
final all decisions or interpretations of the Administrator upon any questions arising under the Plan or
relating to the Option.
LEAF GROUP LTD.
OPTIONEE
By:
Print
Name:
Title:
By:
Print
Name:
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EXHIBIT A
TO STOCK OPTION GRANT NOTICE
STOCK OPTION AGREEMENT
Pursuant to the Stock Option Grant Notice (the “ Grant Notice
”) to which this Stock Option
Agreement (this “ Agreement
”) is attached, Leaf Group Ltd., a Delaware corporation (the “ Company
”), has granted to the Optionee an option under the Company’s Amended & Restated 2010 Incentive Award
Plan, as amended from time to time (the “ Plan
”) to purchase the number of shares of Common Stock
indicated in the Grant Notice.
ARTICLE I.
GENERAL
1.1 Incorporation of Terms of Plan . The Option is subject to the terms and conditions of the
Plan which are incorporated herein by reference. In the event of any inconsistency between the Plan and this
Agreement, the terms of the Plan shall control.
ARTICLE II.
GRANT OF OPTION
2.1 Grant of Option . In consideration of the Optionee’s past and/or continued employment
with or service to the Company or a Subsidiary and for other good and valuable consideration, effective as
of the Grant Date set forth in the Grant Notice (the “ Grant
Date
”), the Company irrevocably grants to the
Optionee the Option to purchase any part or all of the aggregate number of shares of Common Stock set
forth in the Grant Notice, upon the terms and conditions set forth in the Plan and this Agreement. Unless
designated as a Non-Qualified Stock Option in the Grant Notice, the Option shall be an Incentive Stock
Option to the maximum extent permitted by law.
2.2 Exercise Price . The exercise price of the shares of Common Stock subject to the Option
shall be as set forth in the Grant Notice, without commission or other charge; provided
, however
, that the
price per share of the shares of Common Stock subject to the Option shall not be less than 100% of the Fair
Market Value of a share of Common Stock on the Grant Date. Notwithstanding the foregoing, if this Option
is designated as an Incentive Stock Option and the Optionee is a Greater Than 10% Stockholder as of the
Grant Date, the price per share of the shares of Common Stock subject to the Option shall not be less than
110% of the Fair Market Value of a share of Common Stock on the Grant Date.
2.3 Consideration to the Company . In consideration of the grant of the Option by the
Company, the Optionee agrees to render faithful and efficient services to the Company or any
Subsidiary. Nothing in the Plan or this Agreement shall confer upon the Optionee any right to continue in
the employ or service of the Company or any Subsidiary or shall interfere with or restrict in any way the
rights of the Company and its Subsidiaries, which rights are hereby expressly reserved, to discharge or
terminate the services of the Optionee at any time for any reason whatsoever, with or without Cause, except
to the extent expressly provided otherwise in a written agreement between the Company or a Subsidiary and
the Optionee.
A-1
ARTICLE III.
PERIOD OF EXERCISABILITY
3.1 Commencement of Exercisability .
(a) Subject to Sections 3.2, 3.3, 5.9 and 5.13 hereof, the Option shall become vested and
exercisable in such amounts and at such times as are set forth in the Vesting Schedule in the Grant Notice set
forth above, including any applicable vesting acceleration provisions contained or referenced to therein.
(b) No portion of the Option which has not become vested and exercisable at the date of
the Optionee’s Termination of Service shall thereafter become vested and exercisable, except as may be
otherwise provided by the Administrator or as set forth in a written agreement between the Company and the
Optionee.
3.2 Duration of Exercisability . The installments provided for in the vesting schedule set forth
in the Grant Notice are cumulative. Each such installment which becomes vested and exercisable pursuant
to the vesting schedule set forth in the Grant Notice shall remain vested and exercisable until it becomes
unexercisable under Section 3.3 hereof.
3.3 Expiration of Option . The Option may not be exercised to any extent by anyone after the
first to occur of the following events:
(a) The Expiration Date set forth in the Grant Notice; (b) If this Option is designated as an Incentive Stock Option and the Optionee is a
Greater Than 10% Stockholder as of the Grant Date, the expiration of five (5) years from the Grant Date;
(c) (i) The date that is three (3) months from the date of the Optionee’s Termination of
Service by the Company without Cause or by the Optionee for any reason (other than due to death or
Disability);
(d) The expiration of one (1) year from the date of the Optionee’s Termination of
Service by reason of the Optionee’s death or Disability; or
(e) Company for Cause.
The start of business on the date of the Optionee’s Termination of Service by the
The Optionee acknowledges that an Incentive Stock Option exercised more than three (3) months
after the Optionee’s Termination of Employment, other than by reason of death or Disability, will be taxed as
a Non-Qualified Stock Option.
3.4 Special Tax Consequences . The Optionee acknowledges that, to the extent that the
aggregate Fair Market Value (determined as of the time the Option is granted) of all shares of Common
Stock with respect to which Incentive Stock Options, including the Option, are exercisable for the first time
by the Optionee in any calendar year exceeds $100,000, the Option and such other options shall be NonQualified Stock Options to the extent necessary to comply with the limitations imposed by Section 422(d) of
the Code. The Optionee further acknowledges that the rule set forth in the preceding sentence shall be
applied by taking the Option and other “incentive stock options” into account in the order in
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which they were granted, as determined under Section 422(d) of the Code and the Treasury Regulations
thereunder. ARTICLE IV.
EXERCISE OF OPTION
4.1 Person Eligible to Exercise . Except as provided in Sections 5.2© and 5.2(d) hereof, during
the lifetime of the Optionee, only the Optionee may exercise the Option or any portion thereof. After the
death of the Optionee, any exercisable portion of the Option may, prior to the time when the Option becomes
unexercisable under Section 3.3 hereof, be exercised by the Optionee’s personal representative or by any
person empowered to do so under the deceased Optionee’s will or under the then-applicable laws of descent
and distribution.
4.2 Partial Exercise . Any exercisable portion of the Option or the entire Option, if then wholly
exercisable, may be exercised in whole or in part at any time prior to the time when the Option or portion
thereof becomes unexercisable under Section 3.3 hereof. However, the Option shall not be exercisable with
respect to fractional shares.
4.3 Manner of Exercise . The Option, or any exercisable portion thereof, may be exercised
solely by delivery to the Secretary of the Company (or any third party administrator or other person or entity
designated by the Company) of all of the following prior to the time when the Option or such portion thereof
becomes unexercisable under Section 3.3 hereof:
(a) A written or electronic notice complying with the applicable rules established by the
Administrator stating that the Option , or a portion thereof, is exercised. ; (b) Full payment of the exercise price and applicable withholding taxes to the stock
administrator of the Company for the s hares of Common Stock with respect to which the Option , or portion
thereof, is exercised, in a manner permitted by Section 4.4 hereof; (c) Any other written representations or documents as may be required in the
Administrator’s sole discretion to effect compliance with all applicable provisions of the Securities Act, the
Exchange Act, any other federal, state or foreign securities laws or regulations, the rules of any securities
exchange or automated quotation system on which the shares of Common Stock are listed, quoted or traded
or any other applicable law; and
(d) In the event the Option or portion thereof shall be exercised pursuant to Section 4.1
hereof by any person or persons other than the Optionee, appropriate proof of the right of such person or
persons to exercise the Option.
Notwithstanding any of the foregoing, the Company shall have the right to specify all conditions of the
manner of exercise, which conditions may vary by country and which may be subject to change from time to
time.
4.4 Method of Payment . Payment of the exercise price shall be by any of the following, or a
combination thereof, at the election of the Optionee:
(a) Cash;
(b) Check;
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(c) Delivery of a written or electronic notice that the Optionee has placed a market sell
order with a broker with respect to shares of Common Stock then issuable upon exercise of the Option, and
that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the aggregate exercise price; provided
, that payment of such proceeds is then made to the
Company upon settlement of such sale;
(d) With the consent of the Administrator, surrender of other shares of Common Stock
which have been owned by the Optionee for such period of time as may be required by the Administrator in
order to avoid adverse accounting consequences and having a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the shares of Common Stock with respect to which the
Option or portion thereof is being exercised;
(e) With the consent of the Administrator, surrendered shares of Common Stock
issuable upon the exercise of the Option having a Fair Market Value on the date of exercise equal to the
aggregate exercise price of the shares of Common Stock with respect to which the Option or portion thereof
is being exercised; or
(f) With the consent of the Administrator, such other form of legal consideration as
may be acceptable to the Administrator.
4.5 Restrictions on Exercise . If the issuance of shares of Common Stock upon such exercise or
if the method of payment for such shares would constitute a violation of any applicable federal or state
securities or other law or regulation, then the Option may not be exercised. The Company may require the
Optionee to make any representation and warranty to the Company as may be required by any applicable law
or regulation before allowing the Option to be exercised. 4.6 Conditions to Issuance of Stock Certificates . The shares of Common Stock deliverable
upon the exercise of the Option, or any portion thereof, may be either previously authorized but unissued
shares of Common Stock, treasury shares of Common Stock or issued shares of Common Stock which have
then been reacquired by the Company. Such shares of Common Stock shall be fully paid and nonassessable.
The Company shall not be required to issue or deliver any certificates or make any book entries evidencing
shares of Common Stock purchased upon the exercise of the Option or portion thereof prior to fulfillment of
the conditions set forth in Section 11.4 of the Plan.
4.7 Rights as Stockholder . The holder of the Option shall not be, nor have any of the rights or
privileges of, a stockholder of the Company in respect of any shares of Common Stock purchasable upon the
exercise of any part of the Option unless and until such shares of Common Stock shall have been issued by
the Company to such holder (as evidenced by the appropriate entry on the books of the Company or of a
duly authorized transfer agent of the Company). No adjustment will be made for a dividend or other right
for which the record date is prior to the date the shares of Common Stock are issued, except as provided in
Section 13.2 of the Plan. ARTICLE V.
OTHER PROVISIONS
5.1 Administration . The Administrator shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are
consistent therewith and to interpret, amend or revoke any such rules. All actions taken and all
interpretations and determinations made by the Administrator in good faith shall be final and binding upon
the Optionee, the Company and all other interested persons. No member of the Administrator or the
A-4
Board shall be personally liable for any action, determination or interpretation made in good faith with
respect to the Plan, this Agreement or the Option. 5.2 Transferability of Option . Except as otherwise set forth in the Plan:
(a) The Option may not be sold, pledged, assigned or transferred in any manner other
than by will or the laws of descent and distribution or, subject to the consent of the Administrator, pursuant
to a DRO, unless and until the Option has been exercised and the shares underlying the Option have been
issued, and all restrictions applicable to such shares have lapsed. Without limiting the generality of the
foregoing (and without limiting any other restrictions on transfer contained in this Agreement or the Plan),
prior to exercise, the shares of Common Stock underlying the Option may not be sold, pledged, assigned,
hypothecated, transferred or disposed of (each, a “ Transfer
”) in any manner, including through any short
position, any “put equivalent position” or any “call equivalent position” (each within the meaning of the
rules promulgated under the Exchange Act), provided
, that the restrictions contemplated by this sentence
shall not preclude the Optionee’s Transfer of the Option with the prior consent of the Administrator (i) to the
Company, (ii) to a Permitted Transferee through a gift or domestic relations order, (iii) to the Optionee’s
guardian or executor upon the Optionee’s death or Disability or (iv) in connection with a Change in Control
if, after such transaction, the Option will no longer be outstanding and the Company will no longer be
relying on the exemption provided under Rule 12h-1(f) of the Exchange Act; further provided
that any
transferee under clause (ii) or (iii) of this sentence shall not be permitted to make any further Transfers of the
Option and, prior to exercise, the shares of Common Stock underlying the Option.
(b) The Option shall not be liable for the debts, contracts or engagements of the
Optionee or the Optionee’s successors in interest or subject to disposition by transfer, alienation,
anticipation, pledge, hypothecation, encumbrance, assignment or any other means whether such disposition
be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other
legal or equitable proceedings (including bankruptcy) unless and until the Option has been exercised, and
any attempted disposition thereof shall be null and void and of no effect, except to the extent that such
disposition is permitted by Section 5.2(a) hereof. (c) During the lifetime of the Optionee, only the Optionee may exercise the Option (or
any portion thereof), unless it has been disposed of pursuant to a DRO; after the death of the Optionee, any
exercisable portion of the Option may, prior to the time when such portion becomes unexercisable under the
Plan or this Agreement, be exercised by the Optionee’s personal representative or by any person empowered
to do so under the deceased Optionee’s will or under the then applicable laws of descent and distribution.
(d) Notwithstanding any other provision in this Agreement, the Optionee may, in the
manner determined by the Administrator, designate a beneficiary to exercise the rights of the Optionee and
to receive any distribution with respect to the Option upon the Optionee’s death. A beneficiary, legal
guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject to all terms
and conditions of the Plan and this Agreement, except to the extent the Plan and this Agreement otherwise
provide, and to any additional restrictions deemed necessary or appropriate by the Administrator. If the
Optionee is married or a domestic partner in a domestic partnership qualified under applicable law and
resides in a community property state, a designation of a person other than the Optionee’s spouse or
domestic partner, as applicable, as his or her beneficiary with respect to more than 50% of the Optionee’s
interest in the Option shall not be effective without the prior written consent of the Optionee’s spouse or
domestic partner. If no beneficiary has been designated or survives the Optionee, payment shall be made to
the person entitled thereto pursuant to the Optionee’s will or the laws of descent and distribution. Subject to
the foregoing, a beneficiary designation may be changed or revoked by the
A-5
Optionee at any time provided the change or revocation is filed with the Administrator prior to the
Optionee’s death.
5.3 Tax Consultation . Optionee understands that Optionee may suffer adverse tax
consequences as a result of Optionee’s the grant, vesting and/or exercise of the Option, and/or with the
purchase or disposition of the shares of Common Stock subject to the Option. Optionee represents that
Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase
or disposition of such shares and that Optionee is not relying on the Company for any tax advice.
5.4 Adjustments . The Optionee acknowledges that the Option is subject to modification and
termination in certain events as provided in this Agreement and Article 13 of the Plan.
5.5 Notices . Any notice to be given under the terms of this Agreement to the Company shall be
addressed to the Company in care of the Secretary of the Company at the Company’s current headquarter
address at any given time, and any notice to be given to the Optionee shall be addressed to the Optionee at
the most recent address on file with the Company’s People Operations department. By a notice given
pursuant to this Section 5.5, either party may hereafter designate a different address for notices to be given to
that party. Any notice which is required to be given to the Optionee shall, if the Optionee is then deceased,
be given to the person entitled to exercise his or her Option pursuant to Section 4.1 hereof by written notice
under this Section 5.5. Any notice shall be deemed duly given when sent via email or when sent by certified
mail (return receipt requested) and deposited (with postage prepaid) in a post office or branch post office
regularly maintained by the United States Postal Service.
5.6 Optionee’s Representations . If the shares of Common Stock purchasable pursuant to the
exercise of this Option have not been registered under the Securities Act or any applicable state laws on an
effective registration statement at the time this Option is exercised, the Optionee shall, if required by the
Company, concurrently with the exercise of all or any portion of this Option, make such written
representations as are deemed necessary or appropriate by the Company and/or its counsel.
5.7 Titles . Titles are provided herein for convenience only and are not to serve as a basis for
interpretation or construction of this Agreement.
5.8 Governing Law . The laws of the State of Delaware shall govern the interpretation, validity,
administration, enforcement and performance of the terms of this Agreement regardless of the law that might
be applied under principles of conflicts of laws.
5.9 Conformity to Securities Laws . The Optionee acknowledges that the Plan and this
Agreement are intended to conform to the extent necessary with all provisions of the Securities Act and the
Exchange Act and any and all regulations and rules promulgated by the Securities and Exchange
Commission thereunder, and state securities laws and regulations. Notwithstanding anything herein to the
contrary, the Plan shall be administered, and the Option is granted and may be exercised, only in such a
manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the
Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and
regulations.
5.10 Amendments, Suspension and Termination . To the extent permitted by the Plan,
this Agreement may be wholly or partially amended or otherwise modified, suspended or terminated at any
time or from time to time by the Committee or the Board ,
provided,
however
, that, except as may otherwise
be provided by the Plan, no amendment, modification, suspension or termination of this
A-6
Agreement shall adversely affect the Option in any material way without the prior written consent of the
Optionee. 5.11 Successors and Assigns . The Company may assign any of its rights under this Agreement
to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of
the Company. Subject to the restrictions on transfer herein set forth in this Article 5, this Agreement shall be
binding upon the Optionee and his or her heirs, executors, administrators, successors and assigns.
5.12 Notification of Disposition . If this Option is designated as an Incentive Stock Option, the
Optionee shall give prompt notice to the Company of any disposition or other transfer of any shares of
Common Stock acquired under this Agreement if such disposition or transfer is made (a) within two years
from the Grant Date with respect to such shares of Common Stock or (b) within one year after the transfer of
such shares of Common Stock to the Optionee. Such notice shall specify the date of such disposition or
other transfer and the amount realized, in cash, other property, assumption of indebtedness or other
consideration, by the Optionee in such disposition or other transfer.
5.13 Limitations Applicable to Section 16 Persons . Notwithstanding any other provision of the
Plan or this Agreement, if the Optionee is subject to Section 16 of the Exchange Act, the Plan, the Option
and this Agreement shall be subject to any additional limitations set forth in any applicable exemptive rule
under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that
are requirements for the application of such exemptive rule. To the extent permitted by applicable law, this
Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
5.14 Not a Contract of Employment . Nothing in this Agreement or in the Plan shall confer upon
the Optionee any right to continue to serve as an employee or other service provider of the Company or any
of its Subsidiaries.
5.15 Entire Agreement . The Plan, the Grant Notice and this Agreement constitute the entire
agreement of the parties and supersede in their entirety all prior undertakings and agreements of the
Company and the Optionee with respect to the subject matter hereof.
5.16 Section 409A . Notwithstanding any other provision of the Plan, this Agreement or
the Grant Notice, the Plan, this Agreement and the Grant Notice shall be interpreted in accordance with the
requirements of Section 409A of the Code (together with any Department of Treasury regulations and other
interpretive guidance issued thereunder, including without limitation any such regulations or other guidance
that may be issued after the date hereof, “ Section
409A
”). The Administrator may, in its discretion, adopt
such amendments to the Plan, this Agreement or the Grant Notice or adopt other policies and procedures
(including amendments, policies and procedures with retroactive effect), or take any other actions, as the
Administrator determines are necessary or appropriate to comply with the requirements of Section 409A.
A-7
Exhibit 10.6
LEAF GROUP LTD.
AMENDED & RESTATED 2010 INCENTIVE AWARD PLAN
RESTRICTED STOCK UNIT AWARD GRANT NOTICE
Leaf Group Ltd., a Delaware corporation, (the “ Company
”), pursuant to its Amended & Restated
2010 Incentive Award Plan, as further amended from time to time (the “ Plan
”), hereby grants to the holder
listed below (“ Participant
”), an award of restricted stock units (“ Restricted
Stock
Units
” or “ RSUs
”). Each vested Restricted Stock Unit represents the right to receive, in accordance with the Restricted Stock
Unit Award Agreement attached hereto as Exhibit A (the “ Agreement
”), one share of Common Stock. This
award of Restricted Stock Units is subject to all of the terms and conditions set forth herein and in the
Agreement and the Plan, each of which are incorporated herein by reference. Unless otherwise defined
herein, the terms defined in the Plan shall have the same defined meanings in this Restricted Stock Unit
Award Grant Notice (the “ Grant
Notice
”) and the Agreement.
Participant:
__________________________
Grant Date:
__________________________
Total Number of RSUs:
_____________
Initial Vest Date:
_____________
Vesting Schedule:
__________________________
To the extent that the vesting schedule would result in the vesting of
any fractional RSU shares, such fractional shares shall remain
unvested unless and until the occurrence of a subsequent vesting
date on which the sum of all such fractional shares that would
otherwise have vested on or prior to such subsequent vesting date
equals a whole share, at which time the RSU shall vest with respect
to such whole share (subject to the grantee’s continued service
through such date).
This Grant Notice shall be governed in all respects by the terms and
conditions of the Plan and the Agreement.
Termination:
If Participant experiences a Termination of Service prior to the
applicable vesting date, all RSUs that have not become vested on or
prior to the date of such Termination of Service (after taking into
consideration any vesting that may occur in connection with such
Termination of Service, if any) will thereupon be automatically
forfeited by Participant without payment of any consideration
therefor.
By his or her electronic signature and the Company’s signature below, Participant agrees to be bound
by the terms and conditions of the Plan, the Agreement and this Grant Notice. Participant has reviewed the
Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of
counsel prior to accepting this Grant Notice and fully understands all provisions of this Grant Notice, the
Agreement and the Plan. Participant hereby agrees to accept as binding, conclusive and
final all decisions or interpretations of the Administrator upon any questions arising under the Plan, this
Grant Notice or the Agreement. LEAF GROUP LTD.: Participant:
Title:
By:
Print
Name: PARTICIPANT:
By:
Print Name:
EXHIBIT A
TO RESTRICTED STOCK UNIT AWARD GRANT NOTICE
LEAF GROUP LTD. RESTRICTED STOCK UNIT AWARD AGREEMENT
ARTICLE 1.
GENERAL
1.1 Incorporation of Terms of Plan . The RSUs are subject to the terms and conditions of the
Plan, which are incorporated herein by reference. In the event of any inconsistency between the Plan and
this Agreement, the terms of the Plan shall control.
ARTICLE 2.
GRANT OF RESTRICTED STOCK UNITS
2.1 Grant of RSUs . Pursuant to the Grant Notice and upon the terms and conditions set forth
in the Plan and this Agreement, effective as of the Grant Date set forth in the Grant Notice, the Company,
hereby grants to Participant an award of RSUs under the Plan in consideration of Participant’s past and/or
continued employment with or service to the Company or its Affiliates and for other good and valuable
consideration.
2.2 Unsecured Obligation to RSUs . Unless and until the RSUs have vested in the manner set
forth in Article 2 hereof, Participant will have no right to receive Common Stock under any such
RSUs. Prior to actual payment of any vested RSUs, such RSUs will represent an unsecured obligation of
the Company, payable (if at all) only from the general assets of the Company. 2.3 Vesting Schedule . Subject to Section ‎2.5 hereof, the RSUs shall vest and become
nonforfeitable with respect to the applicable portion thereof according to the vesting schedule set forth in
the Grant Notice, subject to Participant’s continued status as an Employee, Consultant or Non-Employee
Director through the applicable vesting dates, including any applicable vesting acceleration provisions
contained or referenced to therein.
2.4 Consideration to the Company . In consideration of the grant of the award of RSUs
pursuant hereto, Participant agrees to render faithful and efficient services to the Company or any
Subsidiary. Nothing in the Plan or this Agreement shall confer upon Participant any right to continue in
the employ or service of the Company or any Subsidiary or shall interfere with or restrict in any way the
rights of the Company and its Subsidiaries, which rights are hereby expressly reserved, to discharge or
terminate the services of Participant at any time for any reason whatsoever, with or without Cause.
2.5 Forfeiture, Termination and Cancellation upon Termination of Service . Subject to the
provisions of the Participant’s employment agreement entered into with the Company and currently in
effect (as such agreement may be further amended or replaced), upon Participant’s Termination of Service
for any or no reason, all Restricted Stock Units which have not vested prior to or in connection with such
Termination of Service will thereupon automatically be forfeited, terminated and cancelled as of the
applicable termination date without payment of any consideration by the Company, and Participant, or
Participant’s beneficiary or personal representative, as the case may be, shall have no further rights
hereunder. No portion of the RSUs which has not become vested as of the date on which Participant
incurs a Termination of Service shall thereafter become vested.
A-1
2.6 Issuance of Common Stock upon Vesting . (a) As soon as administratively practicable following the vesting of any Restricted
Stock Units pursuant to Section ‎2.3 hereof, but in no event later than thirty (30) days after such vesting
date (for the avoidance of doubt, this deadline is intended to comply with the “short term deferral”
exemption from Section 409A of the Code), the Company shall deliver to Participant (or any transferee
permitted under Section ‎3.2 hereof) a number of Shares (either by delivering one or more certificates for
such Shares or by entering such Shares in book entry form, as determined by the Company in its sole
discretion) equal to the number of RSUs subject to this award that vest on the applicable vesting date,
unless such RSUs terminate prior to the given vesting date pursuant to Section ‎2.5
hereof. Notwithstanding the foregoing, in the event Shares cannot be issued pursuant to Section 11.4 of
the Plan, the Shares shall be issued pursuant to the preceding sentence as soon as administratively
practicable after the Administrator determines that Shares can again be issued in accordance with such
Section.
(b) As set forth in Section 11.2 of the Plan, the Company shall have the authority and
the right to deduct or withhold, or to require Participant to remit to the Company, an amount sufficient to
satisfy all applicable federal, state and local taxes required by law to be withheld with respect to any
taxable event arising in connection with the Restricted Stock Units. The Company shall not be obligated to
deliver any new certificate representing Shares to Participant or Participant’s legal representative or enter
such Share of Common Stock in book entry form unless and until Participant or Participant’s legal
representative shall have paid or otherwise satisfied in full the amount of all federal, state and local taxes
applicable to the taxable income of Participant resulting from the grant or vesting of the Restricted Stock
Units or the issuance of Shares. 2.7 Conditions to Delivery of Common Stock . The Shares deliverable hereunder may be
either previously authorized but unissued Shares, treasury Shares or issued Shares which have then been
reacquired by the Company. Such Shares shall be fully paid and nonassessable. The Company shall not
be required to issue or deliver any certificates or make any book entries evidencing Shares deliverable
hereunder prior to fulfillment of the conditions set forth in Section 11.4 of the Plan.
2.8 Rights as Stockholder . The holder of the RSUs shall not be, nor have any of the rights or
privileges of, a stockholder of the Company, including, without limitation, voting rights and rights to
dividends, in respect of the RSUs and any Shares underlying the RSUs and deliverable hereunder unless
and until such Shares shall have been issued by the Company and held of record by such Participant (as
evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of
the Company). No adjustment will be made for a dividend or other right for which the record date is prior
to the date the Shares are issued, except as provided in Section 13.2 of the Plan. ARTICLE 3.
OTHER PROVISIONS
3.1 Administration . The Administrator shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are
consistent therewith and to interpret, amend or revoke any such rules. All actions taken and all
interpretations and determinations made by the Administrator in good faith shall be final and binding upon
Participant, the Company and all other interested persons. No member of the Administrator or the Board
shall be personally liable for any action, determination or interpretation made in good faith with respect to
the Plan, this Agreement or the RSUs. A-2
3.2 Grant is Not Transferable . During the lifetime of Participant, the RSUs may not be sold,
pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or,
subject to the consent of the Administrator, pursuant to a DRO. Neither the RSUs nor any interest or right
therein shall be liable for the debts, contracts or engagements of Participant or his or her successors in
interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or involuntary or by operation of law
by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including
bankruptcy), and any attempted disposition thereof shall be null and void and of no effect, except to the
extent that such disposition is permitted by the preceding sentence.
3.3 Tax Consultation . Participant understands that Participant may suffer adverse tax
consequences in connection with the RSUs granted pursuant to this Agreement (and the shares issuable
with respect thereto). Participant represents that Participant has consulted with any tax consultants
Participant deems advisable in connection with the RSUs and the issuance of shares with respect thereto
and that Participant is not relying on the Company for any tax advice.
3.4 Adjustments . Participant acknowledges that the RSUs are subject to modification and
termination in certain events as provided in this Agreement and Article 13 of the Plan.
3.5 Binding Agreement . Subject to the limitation on the transferability of the RSUs contained
herein, this Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal
representatives, successors and assigns of the parties hereto.
3.6 Notices . Any notice to be given under the terms of this Agreement to the Company shall be
addressed to the Company in care of the Secretary of the Company at the Company’s principal office, and
any notice to be given to Participant shall be addressed to Participant at Participant’s last address reflected
on the Company’s records. By a notice given pursuant to this Section 3.6, either party may hereafter
designate a different address for notices to be given to that party. Any notice shall be deemed duly given
when sent via email or when sent by certified mail (return receipt requested) and deposited (with postage
prepaid) in a post office or branch post office regularly maintained by the United States Postal Service.
3.7 Participant’s Representations . If the Shares issuable hereunder have not been registered
under the Securities Act or any applicable state laws on an effective registration statement at the time of
such issuance, Participant shall, if required by the Company, concurrently with such issuance, make such
written representations as are deemed necessary or appropriate by the Company and/or its counsel.
3.8 Titles . Titles are provided herein for convenience only and are not to serve as a basis for
interpretation or construction of this Agreement.
3.9 Governing Law . The laws of the State of Delaware shall govern the interpretation, validity,
administration, enforcement and performance of the terms of this Agreement regardless of the law that
might be applied under principles of conflicts of laws.
3.10 Conformity to Securities Laws . Participant acknowledges that the Plan and this Agreement
are intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange
Act, and any and all regulations and rules promulgated by the Securities and Exchange Commission
thereunder, and state securities laws and regulations. Notwithstanding anything herein to the contrary, the
Plan shall be administered, and the RSUs are granted, only in such a manner as to conform to such laws,
rules and regulations. To the extent permitted by applicable law, the Plan and this
A-3
Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.
3.11 Amendment, Suspension and Termination . To the extent permitted by the Plan, this
Agreement may be wholly or partially amended or otherwise modified, suspended or terminated at any
time or from time to time by the Committee or the Board; provided, however,
that, except as may
otherwise be provided by the Plan, no amendment, modification, suspension or termination of this
Agreement shall adversely affect the RSUs in any material way without the prior written consent of
Participant. 3.12 Successors and Assigns . The Company or any Affiliate may assign any of its rights under
this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the
successors and assigns of the Company and its Affiliates. Subject to the restrictions on transfer herein set
forth in Section ‎3.2 hereof, this Agreement shall be binding upon Participant and his or her heirs,
executors, administrators, successors and assigns.
3.13 Limitations Applicable to Section 16 Persons . Notwithstanding any other provision of the
Plan or this Agreement, if Participant is subject to Section 16 of the Exchange Act, the Plan, the RSUs and
this Agreement shall be subject to any additional limitations set forth in any applicable exemptive rule
under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that
are requirements for the application of such exemptive rule. To the extent permitted by applicable law, this
Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
3.14 Entire Agreement . The Plan, the Grant Notice and this Agreement constitute the entire
agreement of the parties and supersede in their entirety all prior undertakings and agreements of the
Company and its Affiliates and Participant with respect to the subject matter hereof.
3.15 Section 409A . Notwithstanding any other provision of the Plan, this Agreement or
the Grant Notice, the Plan, this Agreement and the Grant Notice shall be interpreted in accordance with the
requirements of Section 409A of the Code (together with any Department of Treasury regulations and
other interpretive guidance issued thereunder, including without limitation any such regulations or other
guidance that may be issued after the date hereof, “ Section 409A
”). The Administrator may, in its
discretion, adopt such amendments to the Plan, this Agreement or the Grant Notice or adopt other policies
and procedures (including amendments, policies and procedures with retroactive effect), or take any other
actions, as the Administrator determines are necessary or appropriate to comply with the requirements of
Section 409A. 3.16 Limitation on Participant’s Rights . Participation in the Plan confers no rights or interests
other than as herein provided. This Agreement creates only a contractual obligation on the part of the
Company as to amounts payable and shall not be construed as creating a trust. The Plan, in and of itself,
has no assets. Participant shall have only the rights of a general unsecured creditor of the Company and its
Affiliates with respect to amounts credited and benefits payable, if any, with respect to the RSUs, and
rights no greater than the right to receive the Common Stock as a general unsecured creditor with respect
to RSUs, as and when payable hereunder. 3.17 Not a Contract of Service Relationship . Nothing in this Agreement or in the Plan shall
confer upon Participant any right to continue to serve as an employee or other service provider of the
Company or any of its Affiliates or shall interfere with or restrict in any way the rights of the Company and
its Affiliates, which rights are hereby expressly reserved, to discharge or terminate the services of
A-4
Participant at any time for any reason whatsoever, with or without Cause, except to the extent expressly
provided otherwise in a written agreement between the Company or an Affiliate and Participant.
A-5
Exhibit 10.7
LEAF GROUP LTD.
AMENDED & RESTATED 2010 INCENTIVE AWARD PLAN
RESTRICTED STOCK UNIT AWARD GRANT NOTICE
Leaf Group Ltd., a Delaware corporation, (the “ Company
”), pursuant to its Amended & Restated
2010 Incentive Award Plan, as further amended from time to time (the “ Plan
”), hereby grants to the holder
listed below (“ Participant
”), an award of restricted stock units (“ Restricted
Stock
Units
” or “ RSUs
”). Each vested Restricted Stock Unit represents the right to receive, in accordance with the Restricted Stock
Unit Award Agreement attached hereto as Exhibit A (the “ Agreement
”), one share of Common Stock. This
award of Restricted Stock Units is subject to all of the terms and conditions set forth herein and in the
Agreement and the Plan, each of which are incorporated herein by reference. Unless otherwise defined
herein, the terms defined in the Plan shall have the same defined meanings in this Restricted Stock Unit
Award Grant Notice (the “ Grant
Notice
”) and the Agreement.
Participant:
__________________________
Grant Date:
__________________________
Total Number of RSUs:
_____________
Initial Vest Date:
_____________
Vesting Schedule:
__________________________
To the extent that the vesting schedule would result in the vesting of
any fractional RSU shares, such fractional shares shall remain
unvested unless and until the occurrence of a subsequent vesting
date on which the sum of all such fractional shares that would
otherwise have vested on or prior to such subsequent vesting date
equals a whole share, at which time the RSU shall vest with respect
to such whole share (subject to the grantee’s continued service
through such date).
This Grant Notice shall be governed in all respects by the terms and
conditions of the Plan and the Agreement.
Termination:
If Participant experiences a Termination of Service prior to the
applicable vesting date, all RSUs that have not become vested on or
prior to the date of such Termination of Service (after taking into
consideration any vesting that may occur in connection with such
Termination of Service, if any) will thereupon be automatically
forfeited by Participant without payment of any consideration
therefor.
By his or her electronic signature and the Company’s signature below, Participant agrees to be bound
by the terms and conditions of the Plan, the Agreement and this Grant Notice. Participant has reviewed the
Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of
counsel prior to accepting this Grant Notice and fully understands all provisions of this Grant Notice, the
Agreement and the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions arising under the Plan, this Grant Notice or the
Agreement. By:
Print Name:
Title:
___________________________
___________________________
___________________________
PARTICIPANT:
By:
___________________________
Print Name: ___________________________
LEAF GROUP LTD.:
EXHIBIT A
TO RESTRICTED STOCK UNIT AWARD GRANT NOTICE
LEAF GROUP LTD. RESTRICTED STOCK UNIT AWARD AGREEMENT
ARTICLE 1.
GENERAL
1.1 Incorporation of Terms of Plan . The RSUs are subject to the terms and conditions of the
Plan, which are incorporated herein by reference. In the event of any inconsistency between the Plan and
this Agreement, the terms of the Plan shall control.
ARTICLE 2.
GRANT OF RESTRICTED STOCK UNITS
2.1 Grant of RSUs . Pursuant to the Grant Notice and upon the terms and conditions set forth
in the Plan and this Agreement, effective as of the Grant Date set forth in the Grant Notice, the Company,
hereby grants to Participant an award of RSUs under the Plan in consideration of Participant’s past and/or
continued employment with or service to the Company or its Affiliates and for other good and valuable
consideration.
2.2 Unsecured Obligation to RSUs . Unless and until the RSUs have vested in the manner set
forth in Article 2 hereof, Participant will have no right to receive Common Stock under any such
RSUs. Prior to actual payment of any vested RSUs, such RSUs will represent an unsecured obligation of
the Company, payable (if at all) only from the general assets of the Company. 2.3 Vesting Schedule . Subject to Section ‎2.5 hereof, the RSUs shall vest and become
nonforfeitable with respect to the applicable portion thereof according to the vesting schedule set forth in
the Grant Notice, subject to Participant’s continued status as an Employee, Consultant or Non-Employee
Director through the applicable vesting dates, including any applicable vesting acceleration provisions
contained or referenced to therein.
2.4 Consideration to the Company . In consideration of the grant of the award of RSUs
pursuant hereto, Participant agrees to render faithful and efficient services to the Company or any
Subsidiary. Nothing in the Plan or this Agreement shall confer upon Participant any right to continue in
the employ or service of the Company or any Subsidiary or shall interfere with or restrict in any way the
rights of the Company and its Subsidiaries, which rights are hereby expressly reserved, to discharge or
terminate the services of Participant at any time for any reason whatsoever, with or without Cause.
2.5 Forfeiture, Termination and Cancellation upon Termination of Service . Subject to the
provisions of the Participant’s employment agreement entered into with the Company and currently in
effect (as such agreement may be further amended or replaced), upon Participant’s Termination of Service
for any or no reason, all Restricted Stock Units which have not vested prior to or in connection with such
Termination of Service will thereupon automatically be forfeited, terminated and cancelled as of the
applicable termination date without payment of any consideration by the Company, and Participant, or
Participant’s beneficiary or personal representative, as the case may be, shall have no further rights
hereunder. No portion of the RSUs which has not become vested as of the date on which Participant
incurs a Termination of Service shall thereafter become vested.
A-1
2.6 Issuance of Common Stock upon Vesting . (a) As soon as administratively practicable following the vesting of any Restricted
Stock Units pursuant to Section ‎2.3 hereof, but in no event later than thirty (30) days after such vesting
date (for the avoidance of doubt, this deadline is intended to comply with the “short term deferral”
exemption from Section 409A of the Code), the Company shall deliver to Participant (or any transferee
permitted under Section ‎3.2 hereof) a number of Shares (either by delivering one or more certificates for
such Shares or by entering such Shares in book entry form, as determined by the Company in its sole
discretion) equal to the number of RSUs subject to this award that vest on the applicable vesting date,
unless such RSUs terminate prior to the given vesting date pursuant to Section ‎2.5
hereof. Notwithstanding the foregoing, in the event Shares cannot be issued pursuant to Section 11.4 of
the Plan, the Shares shall be issued pursuant to the preceding sentence as soon as administratively
practicable after the Administrator determines that Shares can again be issued in accordance with such
Section.
(b) As set forth in Section 11.2 of the Plan, the Company shall have the authority and
the right to deduct or withhold, or to require Participant to remit to the Company, an amount sufficient to
satisfy all applicable federal, state and local taxes required by law to be withheld with respect to any
taxable event arising in connection with the Restricted Stock Units. The Company shall not be obligated to
deliver any new certificate representing Shares to Participant or Participant’s legal representative or enter
such Share of Common Stock in book entry form unless and until Participant or Participant’s legal
representative shall have paid or otherwise satisfied in full the amount of all federal, state and local taxes
applicable to the taxable income of Participant resulting from the grant or vesting of the Restricted Stock
Units or the issuance of Shares. 2.7 Conditions to Delivery of Common Stock . The Shares deliverable hereunder may be
either previously authorized but unissued Shares, treasury Shares or issued Shares which have then been
reacquired by the Company. Such Shares shall be fully paid and nonassessable. The Company shall not
be required to issue or deliver any certificates or make any book entries evidencing Shares deliverable
hereunder prior to fulfillment of the conditions set forth in Section 11.4 of the Plan.
2.8 Rights as Stockholder . The holder of the RSUs shall not be, nor have any of the rights or
privileges of, a stockholder of the Company, including, without limitation, voting rights and rights to
dividends, in respect of the RSUs and any Shares underlying the RSUs and deliverable hereunder unless
and until such Shares shall have been issued by the Company and held of record by such Participant (as
evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of
the Company). No adjustment will be made for a dividend or other right for which the record date is prior
to the date the Shares are issued, except as provided in Section 13.2 of the Plan. ARTICLE 3.
OTHER PROVISIONS
3.1 Administration . The Administrator shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are
consistent therewith and to interpret, amend or revoke any such rules. All actions taken and all
interpretations and determinations made by the Administrator in good faith shall be final and binding upon
Participant, the Company and all other interested persons. No member of the Administrator or the Board
shall be personally liable for any action, determination or interpretation made in good faith with respect to
the Plan, this Agreement or the RSUs. A-2
3.2 Grant is Not Transferable . During the lifetime of Participant, the RSUs may not be sold,
pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or,
subject to the consent of the Administrator, pursuant to a DRO. Neither the RSUs nor any interest or right
therein shall be liable for the debts, contracts or engagements of Participant or his or her successors in
interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or involuntary or by operation of law
by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including
bankruptcy), and any attempted disposition thereof shall be null and void and of no effect, except to the
extent that such disposition is permitted by the preceding sentence.
3.3 Tax Consultation . Participant understands that Participant may suffer adverse tax
consequences in connection with the RSUs granted pursuant to this Agreement (and the shares issuable
with respect thereto). Participant represents that Participant has consulted with any tax consultants
Participant deems advisable in connection with the RSUs and the issuance of shares with respect thereto
and that Participant is not relying on the Company for any tax advice.
3.4 Adjustments . Participant acknowledges that the RSUs are subject to modification and
termination in certain events as provided in this Agreement and Article 13 of the Plan.
3.5 Binding Agreement . Subject to the limitation on the transferability of the RSUs contained
herein, this Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal
representatives, successors and assigns of the parties hereto.
3.6 Notices . Any notice to be given under the terms of this Agreement to the Company shall be
addressed to the Company in care of the Secretary of the Company at the Company’s principal office, and
any notice to be given to Participant shall be addressed to Participant at Participant’s last address reflected
on the Company’s records. By a notice given pursuant to this Section 3.6, either party may hereafter
designate a different address for notices to be given to that party. Any notice shall be deemed duly given
when sent via email or when sent by certified mail (return receipt requested) and deposited (with postage
prepaid) in a post office or branch post office regularly maintained by the United States Postal Service.
3.7 Participant’s Representations . If the Shares issuable hereunder have not been registered
under the Securities Act or any applicable state laws on an effective registration statement at the time of
such issuance, Participant shall, if required by the Company, concurrently with such issuance, make such
written representations as are deemed necessary or appropriate by the Company and/or its counsel.
3.8 Titles . Titles are provided herein for convenience only and are not to serve as a basis for
interpretation or construction of this Agreement.
3.9 Governing Law . The laws of the State of Delaware shall govern the interpretation, validity,
administration, enforcement and performance of the terms of this Agreement regardless of the law that
might be applied under principles of conflicts of laws.
3.10 Conformity to Securities Laws . Participant acknowledges that the Plan and this Agreement
are intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange
Act, and any and all regulations and rules promulgated by the Securities and Exchange Commission
thereunder, and state securities laws and regulations. Notwithstanding anything herein to the contrary, the
Plan shall be administered, and the RSUs are granted, only in such a manner as to conform to such laws,
rules and regulations. To the extent permitted by applicable law, the Plan and this
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Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.
3.11 Amendment, Suspension and Termination . To the extent permitted by the Plan, this
Agreement may be wholly or partially amended or otherwise modified, suspended or terminated at any
time or from time to time by the Committee or the Board; provided, however,
that, except as may
otherwise be provided by the Plan, no amendment, modification, suspension or termination of this
Agreement shall adversely affect the RSUs in any material way without the prior written consent of
Participant. 3.12 Successors and Assigns . The Company or any Affiliate may assign any of its rights under
this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the
successors and assigns of the Company and its Affiliates. Subject to the restrictions on transfer herein set
forth in Section ‎3.2 hereof, this Agreement shall be binding upon Participant and his or her heirs,
executors, administrators, successors and assigns.
3.13 Limitations Applicable to Section 16 Persons . Notwithstanding any other provision of the
Plan or this Agreement, if Participant is subject to Section 16 of the Exchange Act, the Plan, the RSUs and
this Agreement shall be subject to any additional limitations set forth in any applicable exemptive rule
under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that
are requirements for the application of such exemptive rule. To the extent permitted by applicable law, this
Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
3.14 Entire Agreement . The Plan, the Grant Notice and this Agreement constitute the entire
agreement of the parties and supersede in their entirety all prior undertakings and agreements of the
Company and its Affiliates and Participant with respect to the subject matter hereof.
3.15 Section 409A . Notwithstanding any other provision of the Plan, this Agreement or
the Grant Notice, the Plan, this Agreement and the Grant Notice shall be interpreted in accordance with the
requirements of Section 409A of the Code (together with any Department of Treasury regulations and
other interpretive guidance issued thereunder, including without limitation any such regulations or other
guidance that may be issued after the date hereof, “ Section 409A
”). The Administrator may, in its
discretion, adopt such amendments to the Plan, this Agreement or the Grant Notice or adopt other policies
and procedures (including amendments, policies and procedures with retroactive effect), or take any other
actions, as the Administrator determines are necessary or appropriate to comply with the requirements of
Section 409A. 3.16 Limitation on Participant’s Rights . Participation in the Plan confers no rights or interests
other than as herein provided. This Agreement creates only a contractual obligation on the part of the
Company as to amounts payable and shall not be construed as creating a trust. The Plan, in and of itself,
has no assets. Participant shall have only the rights of a general unsecured creditor of the Company and its
Affiliates with respect to amounts credited and benefits payable, if any, with respect to the RSUs, and
rights no greater than the right to receive the Common Stock as a general unsecured creditor with respect
to RSUs, as and when payable hereunder. 3.17 Not a Contract of Service Relationship . Nothing in this Agreement or in the Plan shall
confer upon Participant any right to continue to serve as an employee or other service provider of the
Company or any of its Affiliates or shall interfere with or restrict in any way the rights of the Company and
its Affiliates, which rights are hereby expressly reserved, to discharge or terminate the services of
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Participant at any time for any reason whatsoever, with or without Cause, except to the extent expressly
provided otherwise in a written agreement between the Company or an Affiliate and Participant.
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Exhibit 10.8
LEAF GROUP LTD.
2010 EMPLOYEE STOCK PURCHASE PLAN
Leaf Group Ltd. (formerly known as Demand Media, Inc.), a Delaware corporation, hereby
adopts the Leaf Group Ltd. 2010 Employee Stock Purchase Plan, effective as of October 28, 2010 (the
“ Adoption Date ”), subject to stockholder approval.
The purposes of the Plan are as follows:
(1) To assist Eligible Employees of the Company and its Designated Subsidiaries in
acquiring stock ownership in the Company pursuant to a plan which is intended to qualify as an
“employee stock purchase plan,” within the meaning of Section 423(b) of the Code.
(2) To help such employees provide for their future security and to encourage them to
remain in the employment of the Company and its Subsidiary Corporations.
1. Definitions
Whenever any of the following terms is used in the Plan with the first letter or letters
capitalized, it shall have the following meaning unless context clearly indicates to the contrary (such
definitions to be equally applicable to both the singular and the plural forms of the terms defined):
(a) “ Account ” means the account established for a Participant under the Plan.
(b) “ Agent ” means the brokerage firm, bank or other financial institution, entity
or person(s), if any, engaged, retained, appointed or authorized to act as the agent of the Company or
an Employee with regard to the Plan.
(c) “ Authorization ” means a Participant’s payroll deduction authorization with
respect to an Offering provided by such Participant in accordance with Section 3(b) hereof.
(d) “ Authorized Leave of Absence ” means military leave, sick leave or other
bona fide leave of absence from service with the Company or a Company Subsidiary if the period of
the leave does not exceed three months or, if longer, so long as the individual’s right to reemployment
with the Company or a Company Subsidiary is guaranteed either by statute or contract.
(e) “ Board ” means the Board of Directors of the Company, as constituted from
(f) “ Code ” means the Internal Revenue Code of 1986, as amended.
time to time.
(g) “ Committee ” means the committee of the Board appointed to administer the
Plan pursuant to Section 12 hereof.
(h) “ Company ” means Leaf Group Ltd., a Delaware corporation, or any
successor corporation or entity.
(i) “ Compensation ” of an Employee means the regular straight-time earnings or
base salary and commissions paid to the Employee from the Company or any Designated Subsidiary
on each Payday as compensation for services to the Company or any Designated Subsidiary before
deduction for any salary deferral contributions made by the Employee to any tax-qualified or
nonqualified deferred compensation plan of the Company or any Designated Subsidiary, but
excluding all overtime payments, bonuses and other incentive-type payments, education or tuition
reimbursements, imputed income arising under any Company or Designated Subsidiary group
insurance or benefit program, travel expenses, business and moving reimbursements, income received
in connection with any stock options, restricted stock, restricted stock units or other compensatory
equity awards and all contributions made by the Company or any Designated Subsidiary for the
Employee’s benefit under any employee benefit plan now or hereafter established. Such
Compensation shall be calculated before deduction of any income or employment tax withholdings,
but shall be withheld from the Employee’s net income.
(j) “ Date of Exercise ” of any Option means any date during an Offering Period
on which such Option is exercised in accordance with the terms set forth in the applicable Offering.
(k) “ Date of Grant ” of any Option means the date on which such Option is
granted, which shall be the later to occur of the first Trading Day of the Offering in which the Option
is granted in accordance with Section 3(a) hereof or, if applicable under the terms of an Offering, the
subsequent Quarterly Entry Date on which an Eligible Employee’s participation in such Offering
commences.
(l) “ Date of Termination ” means the date on which an individual ceases to be
an Employee (taking into account any Authorized Leave of Absence).
(m) “ Designated Subsidiary ” means any Subsidiary Corporation designated by
the Committee or the Board in accordance with Section 13 hereof.
(n) “ Disability ” shall have the meaning provided in an applicable employment
agreement between the Participant and the Company or a Parent Corporation or Subsidiary
Corporation or, if no such agreement exists or such agreement does not contain an applicable
definition, Disability shall mean the Participant’s total and permanent disability as defined in Code
Section 22(e)(3).
(o) “ Eligible Employee ” means an Employee of the Company or any Designated
Subsidiary who does not, immediately after an Option is granted, own (directly or through attribution)
stock possessing five percent or more of the total combined voting power or value of all classes of
Stock or other stock of the Company, a Parent Corporation or a Subsidiary Corporation (as
determined under Section 423(b)(3) of the Code). For purposes of the foregoing, the rules of Section
424(d) of the Code with regard to the attribution of stock ownership shall apply in determining the
stock ownership of an individual, and stock which an Employee may
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purchase under outstanding options shall be treated as stock owned by the Employee. Notwithstanding
the foregoing, the Committee may determine in its discretion, and if so determined, shall set forth in
the terms of the applicable Offering, that an Employee of the Company or any Designated Subsidiary
shall not be eligible to participate in such Offering if: (1) such Employee has been in the employ of
the Company or any Designated Subsidiary for less than two years (or any shorter period); (2) such
Employee’s customary employment with the Company or any Designated Subsidiary is twenty hours
or less per week and/or not more than five months per calendar year (or any lesser number of hours
per week or months per calendar year); (3) such Employee is a “highly compensated employee” of the
Company or any Designated Subsidiary (within the meaning of Code Section 414(q)), or is such a
“highly compensated employee” (A) with compensation above a specified level, (B) who is an officer
and/or (C) is subject to the disclosure requirements of Section 16(a) of the Exchange Act; and/or (4)
such employee is a citizen or resident of a foreign jurisdiction and the grant of an Option under the
Plan or Offering is prohibited under the laws of such foreign jurisdiction, or compliance with the laws
of such foreign jurisdiction would cause the Plan or Offering to violate the requirements of Code
Section 423; provided , that any exclusion in clauses (1), (2), (3) and (4) shall be applied in an
identical manner under each Offering to all employees of the Company and all Designated
Subsidiaries, in accordance with Treasury Regulation Section 1.423-2(e).
(p) “ Employee ” means an individual who renders services to the Company or a
Designated Subsidiary in the status of an “employee,” within the meaning of Code Section 3401(c)
and the regulations promulgated thereunder. During an Authorized Leave of Absence meeting the
requirements of Treasury Regulation Section 1.421-1(h)(2), an individual shall be treated as an
Employee of the Company or Designated Subsidiary that employs such individual immediately prior
to such leave. “Employee” shall not include any director of the Company or a Designated Subsidiary
who does not render services to the Company or the Designated Subsidiary in the capacity of an
“employee,” within the meaning of Code Section 3401(c).
(q) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
(r) “ Fair Market Value ” shall mean, as of any given date, the value of a share
of Stock determined as follows:
(i) If the Stock is (A) listed on any established securities exchange (such
as the New York Stock Exchange, the NASDAQ Global Market and the NASDAQ Global Select
Market), (B) listed on any national market system or (C) listed, quoted or traded on any automated
quotation system, its Fair Market Value shall be the closing sales price for a share of Stock as quoted
on such exchange or system for such date or, if there is no closing sales price for a share of Stock on
the date in question, the closing sales price for a share of Stock on the last preceding date for which
such quotation exists, as reported in The
Wall
Street
Journal
or such other source as the Committee
deems reliable;
(ii) If the Stock is not listed on an established securities exchange, national
market system or automated quotation system, but the Stock is regularly quoted by a recognized
securities dealer, its Fair Market Value shall be the mean of the high bid and low asked prices for such
date or, if there are no high bid and low asked prices for a share of Stock on such date, the high bid
and low asked prices for a share of Stock on the last preceding date for
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which such information exists, as reported in The
Wall
Street
Journal
or such other source as the
Committee deems reliable; or
(iii) If the Stock is neither listed on an established securities exchange,
national market system or automated quotation system nor regularly quoted by a recognized securities
dealer, its Fair Market Value shall be established by the Committee in good faith.
(s) “ Offering ” means each distinct offering of Options made under this Plan,
within the meaning of Treasury Regulation 1.423-2(a).
(t) “ Offering Period ” means the period, which shall be set by the Committee,
with respect to which Options are granted to Participants under an Offering; provided , that the
duration of any Offering Period can be no more than twenty-seven months.
(u) “ Option ” means an option to purchase shares of Stock granted under the Plan
to a Participant in accordance with Section 3(a) hereof.
(v) “ Option Price ” means the purchase price per share of Stock determined in
accordance with Section 4(b) hereof.
(w) “ Parent Corporation ” means any entity that is a parent corporation of the
Company within the meaning of Code Section 424 and the regulations promulgated thereunder.
(x) “ Participant ” means an Eligible Employee who has elected to participate in
an Offering under the Plan, in accordance with the provisions of Section 3(b) hereof.
(y) “ Payday ” means the regular and recurring established day for payment of
Compensation to an Employee of the Company or any Designated Subsidiary.
(z) “ Plan ” means this Leaf Group Ltd. 2010 Employee Stock Purchase Plan, as
amended and/or restated from time to time.
(aa) “ Quarterly Entry Date ” shall have the meaning set forth in the terms of an
applicable Offering or, absent any such designation, shall mean the first Trading Day in each of
January, April, July and October.
(bb) value per share.
“ Stock ” means the shares of the Company’s common stock, $0.0001 par
(cc) “ Subsidiary Corporation ” means any entity that is a subsidiary corporation
of the Company within the meaning of Code Section 424 and the regulations promulgated thereunder.
In addition, with respect to any sub-plans adopted under Section 12(c) hereof which are designed to
be outside the scope of Code Section 423, Subsidiary Corporation shall include any corporate or
noncorporate entity in which the Company has a direct or indirect equity interest or significant
business relationship.
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(dd) “ Trading Day ” means a day on which the principal securities exchange on
which the Stock is listed is open for trading or, if the Stock is not listed on a securities exchange, shall
mean a business day, as determined by the Committee in good faith.
2. Stock Subject to the Plan
Subject to the provisions of Section 9 hereof (relating to adjustments upon changes in the
Stock) and Section 11 hereof (relating to amendments of the Plan), the Stock that may be sold
pursuant to Options granted under the Plan shall not exceed in the aggregate twenty million
(20,000,000) shares of Stock. The shares of Stock sold pursuant to Options granted under the Plan
may be unissued shares or treasury shares of Stock, or shares reacquired in private transactions or
open market purchases. If and to the extent that any right to purchase reserved shares is not exercised
by any Participant for any reason, or if such right to purchase shall terminate as provided herein,
shares that have not been so purchased hereunder shall again become available for the purposes of this
Plan, unless this Plan shall have been terminated, but all shares sold under this Plan, regardless of
source, shall be counted against the share limitation set forth above.
3. Grant of Options.
(a) Offerings . The Company may make one or more Offerings under the Plan,
which may be successive and/or overlapping with one another, until the earlier of: (1) the date on
which the number of shares of Stock available under the Plan have been sold, or (2) the date on which
the Plan is suspended or terminates. The Committee shall designate the terms and conditions of each
Offering in writing, including without limitation, the Offering Period, the applicable Date(s) of
Exercise, the applicable Option Price, the groups of Eligible Employees who may elect to participate
in accordance with Section 3(b) hereof (which groups of Eligible Employees may vary from Offering
to Offering, subject in all cases to the eligibility requirements of Code Section 423 and the regulations
promulgated thereunder), the time or times at which elections to participate in the Offering shall be
made by Eligible Employees, the maximum percentage of an Eligible Employee’s Compensation that
may be withheld and any maximum number of shares of Stock that may be sold under a particular
Offering, if applicable. Each Participant shall be granted an Option with respect to an Offering on the
applicable Date of Grant. Each Option shall expire on the last Date of Exercise for such Offering
Period immediately after the automatic exercise of the Option in accordance with Section 4(a) hereof,
unless such Option terminates earlier in accordance with Section 5, 6 or 9 hereof. The number of
shares of Stock subject to a Participant’s Option shall equal (i) the cumulative payroll deductions
authorized by such Participant in accordance with subsection (b) for the Offering Period (if any) and
deducted by the Company in accordance with such Authorization (as defined below) since the
applicable Date of Grant or, if later, the most recent prior Date of Exercise occurring during such
Offering Period, divided by (ii) the Option Price for the Option; provided , that the number of shares
of Stock subject to such Option shall not exceed the number determined in accordance with Section
3(c) hereof. In connection with each Offering under the Plan, the Committee may specify a maximum
number of shares of Stock that may be purchased by any Employee pursuant to such Offering. (b) Election to Participate; Payroll Deduction Authorization . An Eligible
Employee shall become a Participant in the Plan only by means of payroll deduction. Each such
Participant who elects to participate in the Plan with respect to an Offering shall deliver to the
Page 5
Company a completed and executed written payroll deduction authorization in a form approved by the
Company (the “ Authorization ”) within the time determined by the Company and set forth in the
terms of such Offering. Each Participant’s Authorization shall give notice of such Participant’s
election to participate in the Plan for such Offering (and subsequent Offerings in which such
Participant is eligible to participate) and shall designate a whole percentage of such Participant’s
Compensation to be withheld by the Company or the Designated Subsidiary employing such
Participant on each Payday during the Offering Period. A Participant may designate any whole
percentage of Compensation that is not less than one percent and not more than a maximum
percentage determined by the Committee in the Offering (which maximum percentage shall be fifty
percent in the absence of such determination). A Participant’s Compensation payable during an
Offering Period shall be reduced each Payday through payroll deduction in an amount equal to the
percentage specified in the Authorization, and such amount shall be credited to such Participant’s
Account under the Plan. A Participant may increase or decrease the percentage of Compensation
designated in the Authorization, subject to the limits of this subsection (b), and/or may suspend the
Authorization, in each case, as permitted by the Committee in its sole discretion with respect to such
Offering and set forth in the terms of such Offering. Any Authorization shall remain in effect for each
subsequent Offering in which the Participant is eligible to participate, unless the Participant submits a
new Authorization pursuant to this subsection (b), withdraws from the Plan pursuant to Section 5
hereof or terminates employment as provided in Section 6 hereof; provided , however , that any
Eligible Employee who elects to participate in one or more Offerings that run, in whole or in part,
concurrently with an Offering in which such Eligible Employee is also participating, shall be required
to submit a separate Authorization with respect to any such concurrent Offering. Notwithstanding the
foregoing, to the extent necessary to comply with Code Section 423(b)(8) and Sections 3(a), (c) and
(d) hereof, the Company may reduce a Participant’s rate of payroll deductions to zero at any time
during any Offering Period. Payroll deductions will recommence at the rate provided by the
Participant in his or her Authorization to the extent such payroll deductions may be applied to
purchase shares of Stock in accordance with Code Section 423(b)(8) and Sections 3(a), (c) and (d)
hereof, unless terminated by the Participant as provided in Section 5 hereof.
(c) $25,000 Limitation . No Participant shall be granted an Option under the Plan
which permits the Participant rights to purchase shares of Stock under the Plan, together with other
options to purchase shares of Stock or other stock under all other employee stock purchase plans of
the Company, any Parent Corporation or any Subsidiary Corporation subject to Code Section 423
(any such Option or other option, a “ Section 423 Option ”), to accrue at a rate which exceeds
$25,000 of fair market value of such shares of Stock or other stock (determined at the time the Section
423 Option is granted) for each calendar year in which any Section 423 Option granted to the
Participant is outstanding at any time. For purposes of the limitation imposed by this subsection, (1)
the right to purchase shares of Stock or other stock under a Section 423 Option accrues when the
Section 423 Option (or any portion thereof) first becomes exercisable during the calendar year, (2) the
right to purchase shares of Stock or other stock under a Section 423 Option accrues at the rate
provided in the Section 423 Option, but in no case may such rate exceed $25,000 of fair market value
of such shares of Stock or other stock (determined at the time such Section 423 Option is granted) for
any one calendar year, and (3) a right to purchase Stock or other stock which has accrued under an
Option may not be carried over to any other Section 423 Option, provided , that Participants may
carry forward amounts so accrued that represent a fractional share of Stock and were withheld but not
applied toward the
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purchase of Stock under an earlier Offering, and may apply such amounts toward the purchase of
additional shares of Stock under a subsequent Offering. The limitation under this subsection (c) shall
be applied in accordance with Code Section 423(b)(8) and the regulations promulgated thereunder.
(d) 5 Percent Holders . No Employee will be granted an Option under this Plan if
or to the extent that, immediately after the grant, such Employee would own shares of Stock
(including stock (i) that would be attributed to such Employee pursuant to Code Section 424(d),
and/or (ii) that the Employee may purchase under outstanding options, regardless of whether or not
the options either (A) qualify for the special tax treatment afforded by Code Section 421(a), (B) may
only be exercised in installments or (C) may only be exercised after the expiration of a fixed period of
time) possessing five percent or more of the total combined voting power or value of all classes of
stock of the Company or of any Subsidiary Corporation or Parent Corporation actually issued and
outstanding immediately after the grant of such Option (excluding the voting power or value of
treasury share or shares authorized for issue under outstanding options held by the Employee or any
other person). 4. Exercise of Options; Option Price.
(a) Option Exercise . Each Participant automatically shall be deemed to have
exercised such Participant’s Option on the applicable Date(s) of Exercise for an Offering Period to the
extent that the balance then in the Participant’s Account is sufficient to purchase, at the Option Price
for such Option, shares of the Stock subject to the Option, provided , that any portion of an Account
balance that is not used to purchase shares of Stock in an Offering (other than any balance that is
sufficient only to purchase a fractional share of Stock) shall be paid to such Participant in one lump
sum in cash within thirty days after the termination of the Offering, without any interest thereon.
(b) Option Price Defined . The purchase price per share of Stock (the “ Option
Price ”) to be paid by a Participant upon the exercise of the Participant’s Option on the applicable
Date(s) of Exercise for an Offering Period shall be determined by the Committee and set forth in the
applicable Offering, provided , that in all events, the Option Price shall be equal to or greater than
85% of the lesser of: (1) the Fair Market Value of a share of Stock on the Date of Exercise for such
Offering Period and (2) the Fair Market Value of a share of Stock on the applicable Date of Grant. (c) Pro Rata Allocations . If the total number of shares of Stock for which
Options are to be exercised on any Date of Exercise exceeds the number of shares of Stock remaining
unsold under the Plan (after deduction for all shares of Stock for which Options have theretofore been
exercised), the Committee shall make a pro rata allocation of the available remaining shares of Stock
in as nearly a uniform manner as shall be practicable, and the balance of the amount credited to the
Account of each Participant which has not been applied to the purchase of shares of Stock shall be
paid to such Participant in one lump sum in cash within thirty days after the applicable Date of
Exercise, without any interest thereon. All Offerings shall terminate automatically upon any Date of
Exercise requiring such a pro rata allocation due to insufficient shares of Stock remaining available
under the Plan, and no further Offerings shall commence under the Plan unless and until additional
shares of Stock become available for
Page 7
issuance under the Plan. If one or more Offerings terminates as a result of the preceding sentence, any
remaining Account balances shall be returned to Participants in single lump-sum payments in cash
within thirty days after such termination, without any interest thereon.
(d) Information Statement . The Company shall provide each Participant whose
Option is exercised with an information statement in accordance with Code Section 6039(a) and the
regulations promulgated thereunder. The Company shall maintain a procedure for identifying
certificates of shares of Stock sold upon the exercise of Options in accordance with Code Section
6039(b).
5. Withdrawal from the Plan.
(a) Withdrawal Election . A Participant may withdraw from participation in an
Offering at any time, except as otherwise determined by the Committee and set forth in the terms of
the applicable Offering. A Participant electing to withdraw from the Plan must deliver to the
Company a notice of withdrawal in a form approved by the Committee (the “ Withdrawal Election
”), not later than fifteen calendar days before the next applicable Date of Exercise with respect to such
Date of Exercise, except as otherwise determined by the Committee and set forth in the terms of the
applicable Offering. A Participant electing to withdraw from the Plan may elect in his or her
Withdrawal Election to either (i) withdraw all of the funds then credited to the Participant’s Account
as of the date on which the Withdrawal Election is received by the Company, in which case amounts
credited to such Account shall be returned to the Participant in one lump-sum payment in cash within
thirty days after such Withdrawal Election is received by the Company, without any interest thereon,
and the Participant shall cease to participate in the Plan and the Participant’s Option for such Offering
shall terminate; or (ii) exercise the Option for the maximum number of whole shares of Stock on the
applicable Date of Exercise with any remaining Account balance returned to the Participant in one
lump-sum payment in cash within thirty days after such Date of Exercise, without any interest
thereon, and after such exercise cease to participate in the Plan.
(b) Eligibility following Withdrawal . A Participant who withdraws from the
Plan with respect to an Offering and who is still an Eligible Employee may elect to participate again
in the Plan for any subsequent Offering or, if permitted under the terms of the Offering, in the same
Offering with respect to portions of the Offering occurring after the Date of Exercise immediately
following the Participant’s withdrawal, in either case, by delivering to the Company an Authorization
pursuant to Section 3(b) hereof. In no event shall any Participant be permitted to reenroll in an
Offering prior to the Date of Exercise immediately following such Participant’s withdrawal
therefrom.
6. Termination of Employment.
(a) Termination of Employment for any Reason Other Than Death . If a
Participant ceases to be an Employee for any reason other than due to the Participant’s death at any
time during an Offering Period, then any Option(s) held by the Participant on the Date of
Termination shall lapse and terminate (taking into account any Authorized Leave of Absence). Upon
a termination described in this Section 6(a), the Participant’s participation in the Plan shall terminate
and amounts credited to the Participant’s Account shall be returned to
Page 8
the Participant in one lump-sum payment in cash within thirty days after such termination, without
any interest thereon.
(b) Termination of Employment Due to Death . If a Participant dies while an
Employee, any Option(s) then-held by such Participant may be exercised by the Participant’s estate or
beneficiary to which the Option is transferred by will or the laws of descent and distribution, in
accordance with Section 7 hereof, and after such exercise, the Participant’s participation in the Plan
shall terminate. Notwithstanding the foregoing, the Participant’s estate or beneficiary may instead
elect by giving written notice to the Committee, no later than five days prior to the applicable Date of
Exercise in accordance with procedures established by the Committee, to withdraw all funds credited
to the Participant’s Account upon the Participant’s death, in which case amounts credited to the
Participant’s Account shall be returned to the Participant’s beneficiary or estate in one lump-sum
payment in cash within thirty days after such election, without any interest thereon.
7. Restriction upon Assignment
An Option granted under the Plan shall not be transferable, other than by will or the applicable
laws of descent and distribution, and is exercisable during the Participant’s lifetime only by the
Participant. Other than the transfer of an Option by will or the applicable laws of descent and
distribution, the Company shall not recognize and shall be under no duty to recognize any assignment
or alienation of any interest of the Participant in the Plan or any Option. Notwithstanding the
foregoing, in the event of the death of a Participant, the Company may recognize the transfer of an
Option pursuant to the operation of a will or the applicable laws of descent or distribution.
8. No Rights of Stockholders until Shares Issued
With respect to shares of Stock subject to an Option, except for the limited purposes expressly
described in Section 3(d) above, a Participant shall not be deemed to be a stockholder of the
Company, and the Participant shall not have any of the rights or privileges of a stockholder, unless
and until such shares have been issued to the Participant following exercise of the Participant’s
Option. No adjustments shall be made for dividends (ordinary or extraordinary, whether in cash
securities, or other property) or distribution or other rights for which the record date occurs before the
date of such issuance, except as otherwise expressly provided herein or by the Committee.
9. Changes in the Stock and Corporate Events; Adjustment of Options.
(a) Subject to Section 9(c) hereof, in the event of any stock dividend, stock split,
combination or exchange of shares, merger, consolidation or other distribution (other than normal
cash dividends) of Company assets to stockholders, or any other change affecting the shares of the
Company’s stock or the share price of the Company’s stock, the Committee shall make equitable
adjustments, if any, to reflect such change with respect to: (i) the aggregate number and kind of shares of Stock with respect to which
Options may be granted (including, but not limited to, adjustments of the limitation in Section 2
hereof on the maximum number of shares of Stock which may be purchased),
Page 9
(ii) the number and kind of shares of Stock (or other securities or property)
subject to outstanding Options, and
(iii) the Option Price with respect to any Option. (b) Subject to Section 9(c) hereof, in the event of any transaction or event
described in Section 9(a) hereof or any unusual or nonrecurring transactions or events affecting the
Company, any Parent Corporation, any Subsidiary Corporation, or the financial statements of the
Company or any Parent Corporation or Subsidiary Corporation, or of changes in applicable laws,
regulations, or accounting principles, the Committee, in its sole discretion, and on such terms and
conditions as it deems appropriate, either by the terms of the Option or by action taken prior to the
occurrence of such transaction or event and either automatically or upon the Participant’s request, is
hereby authorized to take any one or more of the following actions whenever the Committee
determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect to any Option under
the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations
or principles:
(i) To provide that all Options outstanding shall terminate without being
exercised on such date as the Committee determines in its sole discretion, in which case all Participant
Accounts shall be refunded to the respective Participants in a lump sum in cash within thirty days
after such determination, without any interest thereon;
(ii) To provide that all Options outstanding shall be exercised before the
Date of Exercise of such Options on such date as the Committee determines in its sole discretion and
such Options shall terminate immediately after such exercises;
(iii) To provide for either the purchase of any Option outstanding for an
amount of cash equal to the amount that could have been obtained upon the exercise of such Option
had such Option been currently exercisable and shares issued thereunder sold, or the replacement of
such Option with other rights or property selected by the Committee in its sole discretion;
(iv) To provide that such Option be assumed by the successor or survivor
corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, covering
the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices; and
(v) To make adjustments in the number and type of shares of Stock (or
other securities or property) subject to outstanding Options, or in the terms and conditions of
outstanding Options, or Options which may be granted in the future.
(c) No adjustment or action described in this Section 9 or in any other provision of
the Plan shall be authorized to the extent that such adjustment or action would cause the Plan to fail to
satisfy the requirements of Code Section 423. Furthermore, no such adjustment or action shall be
authorized to the extent such adjustment or action would result in short-swing profits liability under
Section 16 of the Exchange Act, or violate the exemptive
Page 10
conditions of Rule 16b-3 unless the Committee determines that the Option is not to comply with such
exemptive conditions.
(d) The existence of the Plan and the Options granted hereunder shall not affect or
restrict in any way the right or power of the Company or the stockholders of the Company to make or
authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital
structure or its business, any merger or consolidation of the Company, any issue of stock or of
options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference
stocks whose rights are superior to or affect the Stock or the rights thereof of which are convertible
into or exchangeable for Stock, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of
a similar character or otherwise.
10. Use of Funds; No interest Paid
All funds received or held by the Company under the Plan shall be included in the general
funds of the Company free of any trust or other restriction and may be used for any corporate
purpose. No interest will be paid to any Participant or credited to any Participant’s Account with
respect to such funds.
11. Amendment, Suspension or Termination of the Plan.
(a) The Board or the Committee may amend, suspend, or terminate the Plan at any
time and from time to time, provided that approval by the Company’s stockholders shall be required
to amend the Plan: (1) to increase (other than an increase pursuant to Section 9(a) hereof) the number
of shares of Stock that may be sold pursuant to Options under the Plan, or (2) in any manner that
would cause the Plan to no longer be an “employee stock purchase plan” within the meaning of Code
Section 423(b). Without stockholder consent and without regard to whether any Participant rights
may be considered to have been “adversely affected,” the Board or the Committee, as applicable, shall
be entitled to implement new or additional Offerings, change the terms of Offerings (including
without limitation, the Offering Periods), limit the frequency and/or number of changes in the amount
withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a
Participant in order to adjust for delays or mistakes in the Company’s processing of properly
completed withholding elections, establish reasonable waiting and adjustment periods and/or
accounting and crediting procedures to ensure that amounts applied toward the purchase of Stock for
each Participant properly correspond with amounts withheld from the Participant’s Compensation,
and establish such other limitations or procedures as the Board or the Committee, as applicable,
determines in its sole discretion advisable which are consistent with the Plan and Code Section 423.
(b) In the event the Board or the Committee, as applicable, determines that the
ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board
or the Committee, as applicable, may, to the extent permitted under Code Section 423, in its discretion
and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such
accounting consequence including, but not limited to:
(i) altering, but not reducing, the Option Price for any Offering Period
including an Offering Period underway at the time of the change in the Option Price;
Page 11
(ii) shortening any Offering Period, including an Offering Period
underway at the time of such action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder approval or the consent of any
Participants.
12. Administration by Committee; Rules and Regulations.
(a) Appointment of Committee . The Plan shall be administered by the
Committee, which shall be composed of members of the Board. Each member of the Committee shall
serve for a term commencing on a date specified by the Board and continuing until the member dies,
resigns or is removed from office by the Board. The Committee at its option may utilize the services
of an Agent and/or employees of the Company to assist in the administration of the Plan, including
establishing and maintaining an individual securities account under the Plan for each Participant.
(b) Duties and Powers of Committee . It shall be the duty of the Committee to
conduct the general administration of the Plan in accordance with the provisions of the Plan. The
Committee shall have the power, subject to, and within the limitations of, the express provisions of
the Plan:
(i) To establish Offerings and applicable Offering Periods;
(ii) To determine when and how Options shall be granted and the
provisions and terms of each Offering (which need not be identical);
(iii) To select Designated Subsidiaries in accordance with Section 13
hereof; and
(iv) To construe and interpret the Plan, the terms of any Offering and the
terms of the Options and to adopt such rules for the administration, interpretation, and application of
the Plan as are consistent therewith and to interpret, amend or revoke any such rules. The Committee,
in the exercise of this power, may correct any defect, omission or inconsistency in the Plan , any
Offering or any Option, in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effect, subject to Code Section 423 and the regulations promulgated thereunder.
The Committee may adopt rules or procedures relating to the operation and administration of
the Plan to accommodate the specific requirements of local laws and procedures. Without limiting the
generality of the foregoing, the Committee is specifically authorized to adopt rules and procedures
regarding handling of participation elections, payroll deductions, payment of interest, conversion of
local currency, payroll tax, withholding procedures and handling of stock certificates which vary with
local requirements. In its absolute discretion, the Board may at any time and from time to time
exercise any and all rights and duties of the Committee under the Plan.
Page 12
(c) Sub-Plans . The Committee may adopt sub-plans applicable to particular
Designated Subsidiaries or locations, which sub-plans may be designed to be outside the scope of
Code Section 423. The rules of such sub-plans may take precedence over other provisions of this
Plan, with the exception of Section 2 hereof, but unless otherwise superseded by the terms of such
sub-plan, the provisions of this Plan shall govern the operation of such sub-plan.
(d) Expenses; Professional Assistance; Good Faith Actions . All expenses and
liabilities incurred by members of the Committee in connection with the administration of the Plan
shall be borne by the Company. The Committee may employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and its officers and directors shall
be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and
all interpretations and determinations made by the Committee in good faith shall be final and binding
upon all Participants, the Company and all other interested persons. No member of the Committee
shall be personally liable for any action, determination or interpretation made in good faith with
respect to the Plan or the Options, and all members of the Committee shall be fully protected by the
Company in respect to any such action, determination, or interpretation.
(e) Indemnification . To the extent allowable pursuant to applicable law, each
member of the Board and any officer or other employee to whom authority to administer any
component of the Plan is delegated shall be indemnified and held harmless by the Company from any
loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in
connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a
party or in which he or she may be involved by reason of any action or failure to act pursuant to the
Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such
action, suit or proceeding against him or her; provided , that he or she gives the Company an
opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle
and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive
of any other rights of indemnification to which such persons may be entitled pursuant to the
Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that
the Company may have to indemnify them or hold them harmless.
13. Designation of Subsidiary Corporations
The Board or the Committee shall designate from among the Subsidiary Corporations, as
determined from time to time, the Subsidiary Corporation or Subsidiary Corporations that shall
constitute Designated Subsidiaries, as reflected on Attachment 1, hereof. The Board or the Committee
may designate a Subsidiary Corporation, or terminate the designation of a Subsidiary Corporation,
without the approval of the stockholders of the Company.
14. No Rights as an Employee
Nothing in the Plan shall be construed to give any person (including any Participant) the right
to remain in the employ of the Company, a Parent Corporation or a Subsidiary Corporation or to
affect the right of the Company, any Parent Corporation or any Subsidiary Corporation to terminate
the employment of any person (including any Participant) at any time, with or without cause, which
right is expressly reserved.
Page 13
15. Term; Approval by Stockholders
Subject to approval by the stockholders of the Company in accordance with this Section, the
Plan shall be in effect until the tenth anniversary of the Adoption Date, unless sooner terminated in
accordance with Section 11 hereof. No Option may be granted during any period of suspension of the
Plan or after termination of the Plan. The Plan shall be submitted for the approval of the Company’s
stockholders within twelve months after the date of the adoption of the Plan by the Board. Options
may be granted before such stockholder approval; provided , that such Options shall not be
exercisable before the time when the Plan is approved by the Company’s stockholders; and, provided ,
further , that if such approval has not been obtained by the end of said 12-month period, all Options
previously granted under the Plan shall thereupon terminate without being exercised.
16. Effect upon Other Plans
The adoption of the Plan shall not affect any other compensation or incentive plans in effect
for the Company, any Parent Corporation or any Subsidiary Corporation. Nothing in this Plan shall
be construed to limit the right of the Company, any Parent Corporation or any Subsidiary Corporation
to: (a) establish any other forms of incentives or compensation for employees of the Company, any
Parent Corporation or any Subsidiary Corporation or (b) grant or assume options otherwise than under
the Plan in connection with any proper corporate purpose, including, but not by way of limitation, the
grant or assumption of options in connection with the acquisition, by purchase, lease, merger,
consolidation or otherwise, of the business, stock or assets of any corporation, firm or association.
17. Conditions to Issuance of Stock Certificates
(a) Notwithstanding anything herein to the contrary, the Company shall not be
required to issue or deliver any certificates or make any book entries evidencing shares of Stock
pursuant to the exercise of an Option by a Participant, unless and until the Board or the Committee
has determined, with advice of counsel, that the issuance of such shares of Stock is in compliance
with all applicable laws, regulations of governmental authorities and, if applicable, the requirements
of any securities exchange or automated quotation system on which the shares of Stock are listed or
traded, and the shares of Stock are covered by an effective registration statement or applicable
exemption from registration. In addition to the terms and conditions provided herein, the Board or the
Committee may require that a Participant make such reasonable covenants, agreements, and
representations as the Board or the Committee, in its discretion, deems advisable in order to comply
with any such laws, regulations, or requirements.
(b) All certificates for shares of Stock delivered pursuant to the Plan and all shares
of Stock issued pursuant to book entry procedures are subject to any stop-transfer orders and other
restrictions as the Committee deems necessary or advisable to comply with federal, state, or foreign
securities or other laws, rules and regulations and the rules of any securities exchange or automated
quotation system on which the shares of Stock are listed, quoted, or traded. The Committee may
place legends on any certificate or book entry evidencing shares of Stock to reference restrictions
applicable to the shares of Stock.
(c) The Committee shall have the right to require any Participant to comply with
any timing or other restrictions with respect to the settlement, distribution or exercise of any Option,
including a window-period limitation, as may be imposed in the sole discretion of the Committee.
Page 14
(d) Notwithstanding any other provision of the Plan, unless otherwise determined
by the Committee or required by any applicable law, rule or regulation, the Company may, in lieu of
delivering to any Participant certificates evidencing shares of Stock issued in connection with any
Option, record the issuance of shares of Stock in the books of the Company (or, as applicable, its
transfer agent or stock plan administrator).
18. Notification of Disposition
Each Participant shall give prompt notice to the Company of any disposition or other transfer
of any shares of Stock purchased upon exercise of an Option if such disposition or transfer is made:
(a) within two years from the Date of Grant of the Option, or (b) within one year after the transfer of
such shares of Stock to such Participant upon exercise of such Option. Such notice shall specify the
date of such disposition or other transfer and the amount realized, in cash, other property, assumption
of indebtedness or other consideration, by the Participant in such disposition or other transfer.
19. Notices
Any notice to be given under the terms of the Plan to the Company shall be addressed to the
Company in care of its Stock Plan Administrator and any notice to be given to any Participant shall be
addressed to such Participant at such Participant’s last address as reflected in the Company’s
records. Alternatively, notice may be given by such as other means as may be specified by the
recipient (including without limitation, by email or facsimile). By a notice given pursuant to this
Section 19, either party may designate a different address for notices to be given to it, him or
her. Any notice which is required to be given to a Participant shall, if the Participant is then deceased,
be given to the Participant’s personal representative if such representative has previously informed the
Company of his status and address by written notice under this Section 19. Any notice shall have
been deemed duly given on the date given if provided through an electronic means such as email or
facsimile or on the date following its deposit with any reputable overnight carrier for next day
delivery.
20. Additional Restrictions of Rule 16b-3
The terms and conditions of options granted hereunder to, and the purchase of shares by,
persons subject to Section 16 of the Exchange Act will comply with the applicable provisions of Rule
16b-3. This Plan will be deemed to contain, and such Options will contain, and the shares issued upon
exercise thereof will be subject to, such additional conditions and restrictions as may be required by
Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect
to Plan transactions.
21. Equal Rights and Privileges
Except with respect to sub-plans designed to be outside the scope of Code Section 423, all
Eligible Employees of the Company (or of any Designated Subsidiary) will have equal rights and
privileges under this Plan to the extent required under Code Section 423 or the regulations
promulgated thereunder so that this Plan qualifies as an “employee stock purchase plan” within the
meaning of Code Section 423 or the regulations promulgated thereunder. Any provision of this Plan
that is inconsistent with Code Section 423 or the regulations promulgated thereunder will, without
further act or amendment by the Company or the Board, be reformed to comply with the equal rights
and privileges requirement of Code Section 423 or the regulations promulgated thereunder.
22. Electronic Forms
To the extent permitted by applicable state law and in the discretion of the Committee, an
Eligible Employee may submit any form or notice as set
Page 15
forth herein by means of an electronic form approved by the Committee (“ Electronic Form
”). Before the commencement of an Offering Period, the Committee shall prescribe the time limits
within which any such Electronic Form shall be submitted to the Committee with respect to such
Offering Period in order to be a valid election.
23. Headings
Headings are provided herein for convenience only and are not to serve as a basis for
interpretation or construction of the Plan.
* * * * * *
I hereby certify that the Plan was adopted by the Board of Directors of Demand Media, Inc.
(n/k/a Leaf Group Ltd.) on September 27, 2010.
* * * * * *
I hereby certify that the Plan was duly approved by the stockholders of Demand Media, Inc.
(n/k/a Leaf Group Ltd.) on October 7, 2010.
* * * * * *
I hereby certify that the Board of Directors of Demand Media, Inc. (n/k/a Leaf Group Ltd.)
approved updates to the foregoing Plan in order to reflect the corporate name change to Leaf Group
Ltd. on October 24, 2016.
Executed on this 9th day of November, 2016.
/s/ DANIEL WEINROT
_______________________
Daniel Weinrot, Secretary
Page 16
ATTACHMENT 1
Designated Subsidiaries
None as of November 2016.
Exhibit 14.1
LEAF GROUP LTD.
CODE OF BUSINESS CONDUCT AND ETHICS
INTRODUCTION
This Code of Business Conduct and Ethics (the “ Code
”) contains general guidelines for conducting
the business of Leaf Group Ltd. (formerly known as Demand Media, Inc., the “ Company
”)
consistent with the highest standards of business ethics. To the extent this Code requires a higher
standard than required by commercial practice or applicable laws, rules or regulations, we adhere to
these higher standards. This Code of Business Conduct and Ethics has been updated to reflect the
new name of the Company as of November 9, 2016.
This Code applies to all of our directors, officers and other employees. We refer to all officers and
other employees covered by this Code as “Company employees” or simply “employees,” unless the
context otherwise requires. In this Code, we refer to our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar functions, as
our “principal financial officers.”
Seeking Help and Information
This Code is not intended to be a comprehensive rulebook and cannot address every situation that you
may face. If you feel uncomfortable about a situation or have any doubts about whether it is
consistent with the Company’s ethical standards, seek help. We encourage you to contact your
supervisor for help first. If your supervisor cannot answer your question or if you do not feel
comfortable contacting your supervisor, contact the Human Resources Department or Legal
Department. The Company has also established an Ethics Helpline that is available 24 hours a day, 7
days a week at the following toll-free number (866) 851-4841, which will also be posted in the
Company’s offices. You may remain anonymous and will not be required to reveal your identity in
calls to the Ethics Helpline, although providing your identity may assist the Company in addressing
your questions or concerns. You may also go to the Ethics Helpline’s website if you want to alert the
Company to an ethical concern, which can be found at http://leafgroup.silentwhistle.com. Again you
may do so anonymously. Reporting Violations of the Code
All employees and directors have a duty to report any known or suspected violation of this Code,
including violations of the laws, rules, regulations or policies that apply to the Company. If you know
of or suspect a violation of this Code, immediately report the conduct to your supervisor. Your
supervisor will contact the Legal Department, which will work with you and your supervisor to
investigate your concern. If you do not feel comfortable reporting the conduct to your supervisor or
you do not get a satisfactory response, you may contact the Legal
Department directly. You may also report known or suspected violations of the Code on the Ethics
Helpline that is available 24 hours a day, 7 days a week at a toll-free number posted in the Company’s
offices. You may also go to the Ethics Helpline’s website. You may remain anonymous and will not
be required to reveal your identity in calls to the Ethics Helpline or on the ethics site, although
providing your identity may assist the Company in investigating your concern. All reports of
known or suspected violations of the law or this Code will be handled sensitively and with discretion.
Your supervisor, the Legal Department and the Company will protect your confidentiality to the
extent possible, consistent with law and the Company’s need to investigate your concern. It is Company policy that any employee or director who violates this Code will be subject to
appropriate discipline, which may include termination of employment or removal from the Board of
Directors, as appropriate. This determination will be based upon the facts and circumstances of each
particular situation. If you are accused of violating this Code you will be given an opportunity to
present your version of the events at issue prior to any determination of appropriate
discipline. Employees and directors who violate the law or this Code may expose themselves to
substantial civil damages, criminal fines and prison terms. The Company may also face substantial
fines and penalties and may incur damage to its reputation and standing in the community. Your
conduct as a representative of the Company, if it does not comply with the law or with this Code, can
result in serious consequences for both you and the Company.
Policy Against Retaliation
The Company prohibits retaliation against an employee or director who, in good faith, seeks help or
reports known or suspected violations. Any reprisal or retaliation against an employee because the
employee, in good faith, sought help or filed a report will be subject to disciplinary action, including
potential termination of employment.
Waivers of the Code
Any waiver of this Code for our directors, executive officers or other principal financial officers may
be made only by our Board of Directors and will be disclosed to the public as required by law or the
rules of the New York Stock Exchange. Waivers of this Code for other employees may be made only
by our Chief Executive Officer or Legal Department and reported to our Audit Committee. CONFLICTS OF INTEREST
Identifying Potential Conflicts of Interest
A conflict of interest can occur when an employee’s or director’s private interest interferes, or appears
to interfere, with the interests of the Company as a whole. You should avoid any private interest that
influences your ability to act in the interests of the Company or that makes it difficult to perform your
work objectively and effectively. Identifying potential conflicts of interest may not always be clear-cut. The following situations are
examples of conflicts of interest:
2
·
Outside Employment . No employee should be employed by, serve as a director of, or
provide any services to a company that the individual knows or suspects is a material
customer, supplier or competitor of the Company.
·
Improper Personal Benefits . No employee should obtain any material (as to him or
her) personal benefits or favors because of his or her position with the Company. For
instance, no employee should be making side deals with the Company’s customers in
which the employee is getting separately compensated by the customer or a third party.
Please also see “Gifts and Entertainment” below for additional guidelines in this area.
·
Financial Interests . No employee should have a significant financial interest
(ownership or otherwise) in any company that the individual knows or suspects is a
material customer, supplier or competitor of the Company. A “significant financial
interest” means (i) ownership of greater than 1% of the equity of a material customer,
supplier or competitor or (ii) an investment in a material customer, supplier or
competitor that represents more than 5% of the total assets of the employee. ·
Loans or Other Financial Transactions . No employee should obtain loans or
guarantees of personal obligations from, or enter into any other personal financial
transaction with, any company that the individual knows or suspects is a material
customer, supplier or competitor of the Company. This guideline does not prohibit
arms-length transactions with banks, brokerage firms or other financial institutions.
·
Service on Boards and Committees . No employee should serve on a board of
directors or trustees or on a committee of any entity (whether profit or not-for-profit)
whose interests reasonably would be expected to conflict with those of the Company. ·
Actions of Family Members . The actions of family members outside the workplace
may also give rise to the conflicts of interest described above because they may
influence an employee’s objectivity in making decisions on behalf of the
Company. For purposes of this Code, “family members” include your spouse or lifepartner, brothers, sisters and parents, in-laws and children whether such relationships
are by blood or adoption.
For purposes of this Code, a company is a “material” customer if the company has made
payments to the Company in the past year in excess of $120,000. A company is a “material” supplier
if it has received payments from the Company in the past year in excess of $120,000. If you are
uncertain whether a particular company is a material customer or supplier, please contact the Legal
Department for assistance.
3
Conflict of interest issues concerning the Company’s directors will be addressed by the
Company’s Audit Committee.
Disclosure of Conflicts of Interest
The Company requires that employees and directors disclose any situation that reasonably
would be expected to give rise to a conflict of interest. If you suspect that you have a conflict of
interest, or something that others could reasonably perceive as a conflict of interest, you must report it
in writing to your supervisor or the Legal Department. Your supervisor and the Legal Department
will work with you to determine whether you have a conflict of interest and, if so, how best to address
it. Although conflicts of interest are not automatically prohibited, they are not desirable and may only
be waived as described in “Waivers of the Code” above.
CORPORATE OPPORTUNITIES
As an employee or director of the Company, you have an obligation to advance the
Company’s interests when the opportunity to do so arises. If you discover or are presented with a
business opportunity through the use of corporate property or information or because of your position
with the Company, you should first present the business opportunity to the Company before pursuing
the opportunity in your individual capacity. No employee may use corporate property, information or
his or her position with the Company for personal gain or should compete with the Company while
employed by us.
You should disclose to your supervisor the terms and conditions of each business opportunity
covered by this Code that you wish to pursue. Your supervisor will contact the Legal Department and
the appropriate management personnel to determine whether the Company wishes to pursue the
business opportunity. If the Company waives its right to pursue the business opportunity, you may
pursue the business opportunity on the same terms and conditions as originally proposed and
consistent with the other ethical guidelines set forth in this Code; provided
that any pursuit of such
business opportunity shall not interfere in any way with or otherwise interrupt your work, duties and
responsibilities as an employee or director of the Company.
CONFIDENTIAL INFORMATION
Employees and directors have access to a variety of confidential information regarding the
Company. Confidential information includes all non-public information that might be of use to
competitors, or, if disclosed, harmful to the Company or its customers. Employees have a duty to
safeguard all confidential information of the Company or third parties with which the Company
conducts business, except when disclosure is authorized or legally mandated. An employee’s
obligation to protect confidential information continues after he or she leaves the
Company. Unauthorized disclosure of confidential information could cause competitive harm to the
Company or its customers and could result in legal liability to you and the Company. Any questions or concerns regarding whether disclosure of Company information is legally
mandated should be promptly referred to the Legal Department.
4
COMPETITION AND FAIR DEALING
All employees should endeavor to deal fairly with fellow employees and with the Company’s
customers, suppliers and competitors. Employees should not take unfair advantage of anyone through
manipulation, concealment, abuse of privileged information, misrepresentation of material facts or
any other unfair-dealing practice.
Relationships with Customers and Strategic Partners
Our business success depends upon our ability to foster lasting customer relationships with our
customers and strategic partners. The Company is committed to dealing with customers and strategic
partners fairly, honestly and with integrity. Specifically, you should keep the following guidelines in
mind when dealing with customers and strategic partners:
Information we supply to customers and strategic partners should be accurate and complete to
the best of our knowledge. Employees should not deliberately misrepresent information to
customers and strategic partners.
· Employees should not refuse to sell, service or maintain products or services the Company
provides simply because a customer or strategic partner is buying products or services from
another supplier or a strategic partner has a relationship with a competitor.
· Customer and strategic partner entertainment should not exceed reasonable and customary
business practice. Please see “Gifts and Entertainment” below for additional guidelines in this
area.
Relationships with Suppliers
·
The Company deals fairly and honestly with its suppliers. This means that our relationships
with suppliers are based on price, quality, service and reputation, among other factors. Employees
dealing with suppliers should carefully guard their objectivity. Specifically, no employee should
accept or solicit any personal benefit from a supplier or potential supplier that might compromise, or
appear to compromise, his or her objective assessment of the supplier’s products and
prices. Employees can give or accept promotional items of reasonable value or moderately scaled
entertainment within the limits of responsible and customary business practice. Please see “Gifts and
Entertainment” below for additional guidelines in this area.
Relationships with Competitors
The Company is committed to free and open competition in the marketplace. Employees
should avoid actions that would be contrary to laws governing competitive practices in the
marketplace, including federal and state antitrust laws. Such actions include misappropriation and/or
misuse of a competitor’s confidential information or making false statements about the competitor’s
business and business practices. For further discussion of appropriate and inappropriate business
conduct with competitors, see “Compliance with Antitrust Laws” below.
5
GIFTS AND ENTERTAINMENT
The giving and receiving of gifts is a common business practice. Appropriate business gifts
and entertainment are welcome courtesies designed to build relationships and understanding among
business partners. Gifts and entertainment, however, should not compromise, or appear to
compromise, your ability to make objective and fair business decisions. In no event may any gift in
the form of marketable securities, cash or cash equivalents (such as Visa gift cards) be accepted or
offered (other than in customary circumstances, such as weddings or funerals).
It is your responsibility to use good judgment in this area. As a general rule, you may give or
receive gifts or entertainment to or from customers or suppliers only to the extent that they comport
with reasonable and customary business practices. Gifts or entertainment will be considered to
comport with reasonable and customary business practices if: (a) it is of a type that is customary,
considering the job duties, job title, and seniority of the person to whom the gift is offered, and (b)
accepting the gift or entertainment serves primarily to enhance the business relationship with the
provider of the gift or entertainment. All gifts and entertainment expenses should be properly accounted for on expense
reports. The following specific examples may be helpful:
·
Meals and Entertainment . You may occasionally accept or give meals, refreshments or other
entertainment if:
·
The items are of reasonable value; and
·
A primary purpose of the meeting or attendance at the event is business related.
Entertainment of reasonable value may include food and tickets for sporting and cultural
events.
·
Advertising and Promotional Materials . You may occasionally accept or give advertising or
promotional materials of reasonable value. ·
Personal Gifts . You may accept or give personal gifts of reasonable value (not to exceed
$200 in face value in a calendar year to or from the same organization) that are related to
recognized special occasions such as a graduation, promotion, new job, wedding, retirement or
holiday. A gift is also acceptable if it is based on a family or personal relationship and
unrelated to the business involved between the individuals.
·
Gifts Rewarding Service or Accomplishment . You may accept a gift from a civic, charitable
or religious organization specifically related to your service or accomplishment.
If you conduct business in other countries, you must be particularly careful that gifts and
entertainment are not construed as bribes, kickbacks or other improper payments. See “The
6
Foreign Corrupt Practices Act and Other Laws Governing Our Business Internationally” for a more
detailed discussion of our policies regarding giving or receiving gifts related to business transactions
in other countries.
You should make every effort to refuse or return a gift that is beyond these permissible
guidelines. If it would be inappropriate to refuse a gift or you are unable to return a gift, you should
promptly report the gift to your supervisor. Your supervisor will bring the gift to the attention of the
Legal Department, who may require you to donate the gift to an appropriate community
organization. If you have any questions about whether it is permissible to accept a gift or something
else of value, contact your supervisor or the Legal Department for additional guidance.
Note: Gifts and entertainment may not be offered or exchanged under any circumstances to or with
any employees or representatives of the U.S., state, local or foreign governments. If you have any
questions about this policy, contact your supervisor or the Legal Department for additional
guidance. For a more detailed discussion of special considerations applicable to dealing with the U.S.,
state, local and foreign governments, see “Interactions with the Government.”
COMPANY RECORDS
Accurate and reliable records are crucial to our business. Our records are the basis of our earnings
statements, financial reports and other disclosures to the public and guide our business decisionmaking and strategic planning. Company records include booking information, payroll, timecards,
travel and expense reports, e-mails, accounting and financial data, measurement and performance
records, electronic data files and all other records maintained in the ordinary course of our business.
All Company records must be complete, accurate and reliable in all material respects. Undisclosed or
unrecorded funds, payments or receipts are inconsistent with our business practices and are
prohibited. You are responsible for understanding and complying with our record keeping
policy. Ask your supervisor if you have any questions.
PROTECTION AND USE OF COMPANY ASSETS
Employees should protect the Company’s assets and ensure their efficient use for legitimate
business purposes only. Theft, carelessness and waste have a direct impact on the Company’s
profitability. The use of Company funds or assets, whether or not for personal gain, for any unlawful
or improper purpose is prohibited.
To ensure the protection and proper use of the Company’s assets, each employee should:
·
Exercise reasonable care to prevent theft, damage or misuse of Company property;
·
Report the actual or suspected theft, damage or misuse of Company property to a supervisor;
7
·
·
·
Use the Company’s telephone system, other electronic communication services, written
materials and other property primarily for business-related purposes;
Safeguard all electronic programs, data, communications and written materials from
inadvertent access by others; and
Use Company property only for legitimate business purposes, as authorized in connection with
your job responsibilities.
Employees should be aware that Company property includes all data and communications transmitted
or received to or by, or contained in, the Company’s electronic or telephonic systems. Company
property also includes all written communications. Employees and other users of this property should
have no expectation of privacy with respect to these communications and data. To the extent
permitted by law, the Company has the ability, and reserves the right, to monitor all electronic and
telephonic communication. These communications may also be subject to disclosure to law
enforcement or government officials. (NOTE: Please see the Company’s Employee Handbook for
more information regarding the Company’s policies and procedures regarding the use of Company
property)
ACCURACY OF FINANCIAL REPORTS AND OTHER PUBLIC COMMUNICATIONS
As a public company we are subject to various securities laws, regulations and reporting
obligations. Both federal law and our policies require the disclosure of accurate and complete
information regarding the Company’s business, financial condition and results of
operations. Inaccurate, incomplete or untimely reporting will not be tolerated and can severely
damage the Company and result in legal liability. The Company’s principal financial officers and other employees working in the Accounting
Department have a special responsibility to ensure that all of our financial disclosures are full, fair,
accurate, timely and understandable. These employees must understand and strictly comply with
generally accepted accounting principles and all standards, laws and regulations for accounting and
financial reporting of transactions, estimates and forecasts. COMPLIANCE WITH LAWS AND REGULATIONS
Each employee and director has an obligation to comply with all laws, rules and regulations
applicable to the Company’s operations. These include, without limitation, laws covering bribery and
kickbacks, copyrights, trademarks and trade secrets, information privacy, insider trading, illegal
political contributions, antitrust prohibitions, foreign corrupt practices, offering or receiving gratuities,
environmental hazards, employment discrimination or harassment, occupational health and safety,
false or misleading financial information or misuse of corporate assets. You are expected to
understand and comply with all laws, rules and regulations that apply to your job position. If any
doubt exists about whether a course of action is lawful, you should seek advice from your supervisor
or the Legal Department. 8
INTERACTIONS WITH THE GOVERNMENT
To the extent that the Company may conduct business with the U.S., state and local governments and
the governments of many foreign countries, the Company is committed to conducting its business
with all governments and their representatives with the highest standards of business ethics and in
compliance with all applicable laws and regulations, including the special requirements that apply to
government contracts and government transactions. If you interact with the government, you should:
· Be forthright and candid at all times. No employee or director should intentionally
misstate or omit any material information from any written or oral communication with
the government.
· Exercise extreme care in maintaining records for and allocating costs to government
contracts. Costs incurred on one government project should not be charged against
another government project.
· Ensure that all required written submissions are made to the government and are
timely, and that all written submissions, whether voluntary or required, satisfy
applicable laws and regulations.
· You should not offer or exchange any gifts, gratuities or favors with, or pay for meals,
entertainment, travel or other similar expenses for, government employees.
If your job responsibilities include interacting with the government, you are expected to understand
and comply with the special laws, rules and regulations that apply to your job position. If any doubt
exists about whether a course of action is lawful, you should seek advice immediately from your
supervisor and the Legal Department. POLITICAL CONTRIBUTIONS AND ACTIVITIES
The Company encourages its employees and directors to participate in the political process as
individuals and on their own time. However, federal and state contribution and lobbying laws
severely limit the contributions the Company can make to political parties or candidates. It is
Company policy that Company funds or assets not be used to make a political contribution to any
political party or candidate, unless prior approval has been given by the Legal Department. The following guidelines are intended to ensure that any political activity you pursue complies with
this policy:
· Contribution of Funds . You may contribute your personal funds to political parties or
candidates. The Company will not reimburse you for personal political contributions. 9
·
Volunteer Activities . You may participate in volunteer political activities during nonwork time. You may not participate in political activities during working hours.
·
Use of Company Facilities . The Company’s facilities generally may not be used for
political activities (including fundraisers or other activities related to running for
office). However, the Company may make its facilities available for limited political
functions, including speeches by government officials and political candidates, with
the approval of the Legal Department. ·
Use of Company Name . When you participate in political affairs, you should be
careful to make it clear that your views and actions are your own, and not made on
behalf of the Company. For instance, Company letterhead should not be used to send
out personal letters in connection with political activities.
These guidelines are intended to ensure that any political activity you pursue is done voluntarily and
with your own resources and time. Please contact the Legal Department if you have any questions
about this policy.
COMPLIANCE WITH ANTITRUST LAWS
Antitrust laws of the U.S. and other countries are designed to protect consumers and competitors
against unfair business practices and to promote and preserve competition. Our policy is to compete
vigorously and ethically while complying with all antitrust, monopoly, competition or cartel laws in
all countries, states or localities in which the Company conducts business. Actions that Violate U.S. Antitrust Laws
In general, U.S. antitrust laws forbid agreements or actions “in restraint of trade.” All employees
should be familiar with the general principles of the U.S. antitrust laws. The following is a summary
of actions that are violations of U.S. antitrust laws:
· Price Fixing . The Company may not agree with its competitors to raise, lower or
stabilize prices or any element of price, including discounts and credit terms. · Limitation of Supply . The Company may not agree with its competitors to limit its
quantity or type of production or restrict the supply of its services.
· Allocation of Business . The Company may not agree with its competitors to divide or
allocate markets, territories or customers.
· Monopolies . The Company may not engage in any behavior that can be construed as
an attempt to monopolize.
· Boycott . The Company may not agree with its competitors to refuse to sell or
purchase products or services from third parties. In addition, the Company may not
prevent a customer from purchasing or using non-Company products or services.
10
·
·
Tying . The Company may not require a customer to purchase a product or service
that it does not want as a condition to the sale of a different product or service that the
customer does wish to purchase.
Price Discrimination . The Company may under some circumstances be prohibited
from charging similarly situated customers different prices for the same good or
service. Consult with the Legal Department before undertaking any such pricing
programs.
Meetings with Competitors
Employees should exercise caution in meetings with competitors. Any meeting with a competitor
may give rise to the appearance of impropriety. As a result, if you are required to meet with a
competitor for any reason, you should obtain the prior approval of the Legal Department, unless such
meeting serves a valuable and legitimate business purpose not outweighed by any risk of impropriety
or antitrust risk, in such case prior approval of the Legal Department is not required. You should try
to meet with competitors in a closely monitored, controlled environment for a limited period of
time. You should create and circulate agendas in advance of any such meetings, and the contents of
your meeting should be fully documented. Specifically, you should avoid any communications with a
competitor regarding any of the topics or matters set forth below, unless such communications serves
a valuable and legitimate business purpose not outweighed by any risk of impropriety or antitrust risk:
Prices;
·
Costs;
·
Market share;
·
· Allocation of sales territories;
· Profits and profit margins;
· Supplier’s terms and conditions;
· Product or service offerings;
· Terms and conditions of sale;
· Bids for a particular contract or program;
· Selection, retention or quality of customers;
· Distribution methods or channels;
· Marketing strategies;
· Future development plans or product roadmaps; or
· Other subjects relating to or affecting the production or sale of products to existing or
prospective customers.
If you participate in a meeting with a competitor in which any of the above topics are broached and
which were not part of the intended purpose of the meeting, you should affirmatively end the
discussion, and you should state your reasons for doing so. During meetings with competitors, avoid
sharing or obtaining confidential information from the competitor. Also avoid statements that could
be construed as unfair acts such as harassment, threats or interference with the competitors’ existing
contractual relationships.
11
Professional Organizations and Trade Associations
Employees should be cautious when attending meetings of professional organizations and trade
associations at which competitors are present. Attending meetings of professional organizations and
trade associations is both legal and proper, if such meetings have a legitimate business purpose and
are conducted in an open fashion, adhering to a proper agenda. At such meetings, you should not
discuss the restricted topics listed above, the Company’s pricing policies or other competitive terms,
plans for new or expanded products, services or facilities or any other proprietary, competitively
sensitive information. Seeking Help
Violations of antitrust laws carry severe consequences and may expose the Company and employees
to substantial civil damages, criminal fines and, in the case of individuals, prison terms. Whenever
any doubt exists as to the legality of a particular action or arrangement, it is your responsibility to
contact the Legal Department promptly for assistance, approval and review.
COMPLIANCE WITH INSIDER TRADING LAWS
Company employees and directors are prohibited from trading in the Company’s stock or other
securities while in possession of material, non-public information about the Company or its
subsidiaries. In addition, Company employees and directors are prohibited from recommending,
“tipping” or suggesting that anyone else buy or sell the Company’s stock or other securities on the
basis of material, non-public information. Employees and directors who obtain material, non-public
information about another company in the course of their duties are prohibited from trading in the
stock or securities of that other company while in possession of such information or “tipping” others
to trade on the basis of such information. Violation of insider trading laws can result in severe fines
and criminal penalties, as well as disciplinary action by the Company, up to and including termination
of employment. You are required to read carefully and observe our Insider Trading Compliance
Program, as amended from time to time. Please inform your supervisor or a principal financial officer
if you do not have a copy of our Insider Trading Compliance Program.
PUBLIC COMMUNICATIONS AND REGULATION FD
Public Communications Generally
The Company places a high value on its credibility and reputation in the community. What is
written or said about the Company in the news media and investment community directly impacts our
reputation, positively or negatively. Our policy is to provide timely, accurate and complete
information in response to public requests (media, analysts, etc.), consistent with our obligations to
maintain the confidentiality of competitive and proprietary information and to prevent selective
disclosure of market-sensitive financial data. To ensure compliance with this policy, all news media
or other public requests for information regarding the Company should be directed to the Company’s
Investor Relations Department. The Investor
12
Relations Department will work with you and the appropriate personnel to evaluate and coordinate a
response to the request.
Compliance with Regulation FD
In connection with its public communications, the Company is required to comply with a rule under
the federal securities laws referred to as Regulation FD (which stands for “fair
disclosure”). Regulation FD provides that, when we disclose material, non-public information about
the Company to securities market professionals or stockholders (where it is reasonably foreseeable
that the stockholders will trade on the information), we must also disclose the information to the
public. “Securities market professionals” generally include analysts, institutional investors and other
investment advisors. You are required to read carefully and comply with our Policy Statement
Containing Guidelines for Corporate Disclosures, as amended from time to time. Please inform your
supervisor or the Legal Department if you do not have a copy of our Policy Statement Containing
Guidelines for Corporate Disclosures.
THE FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS GOVERNING OUR
BUSINESS INTERNATIONALLY
Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act (the “ FCPA
”) prohibits the Company and its employees, directors
and agents from offering or giving money or any other item of value to win or retain business or to
influence any act or decision of any government official, political party, candidate for political office
or official of a public international organization. Stated more concisely, the FCPA prohibits the
payment of bribes, kickbacks or other inducements to foreign officials. This prohibition also extends
to payments to a sales representative or agent if there is reason to believe that the payment will be
used indirectly for a prohibited payment to foreign officials. Violation of the FCPA is a crime that
can result in severe fines and criminal penalties, as well as disciplinary action by the Company, up to
and including termination of employment.
Certain small facilitation payments to foreign officials may be permissible under the FCPA if
customary in the country or locality and intended to secure routine governmental
action. Governmental action is “routine” if it is ordinarily and commonly performed by a foreign
official and does not involve the exercise of discretion. For instance, “routine” functions would
include setting up a telephone line or expediting a shipment through customs. To ensure legal
compliance, any facilitation payments, whether or not covered by the FCPA, must receive prior
written approval from the Legal Department and must be clearly and accurately reported as a
business expense .
Other Laws Governing our Business
The Company’s business may be subject to various U.S. and international trade control regulations,
including licensing, shipping documentation, import documentation and reporting and record retention
requirements. 13
Employees with significant responsibilities in our international business units have an additional
responsibility to understand and comply with such applicable laws. These employees are expected to
have a working knowledge of the laws and regulations applicable to their job positions. Questions
and requests for assistance should be directed to the Legal Department. The Company is also subject to U.S. anti-boycott laws and regulations, which prevent U.S. companies
and certain of their subsidiaries from taking action in support of a boycott imposed by a foreign
country upon a nation that is friendly with the United States. Boycott laws often change and must be
closely monitored. To ensure compliance, any boycott issue must be referred to the Legal
Department.
ENVIRONMENT, HEALTH AND SAFETY
The Company is committed to providing a safe and healthy working environment for its employees
and to avoiding adverse impact and injury to the environment and the communities in which it does
business. Company employees and directors must comply with all applicable environmental, health
and safety laws, regulations and Company standards. It is your responsibility to understand and
comply with the laws, regulations and policies that are relevant to your job. Failure to comply with
environmental, health and safety laws and regulations can result in civil and criminal liability against
you and the Company, as well as disciplinary action by the Company, up to and including termination
of employment. You should contact the Legal Department if you have any questions about the laws,
regulations and policies that apply to you. Environment
All Company employees should strive to conserve resources and reduce waste and emissions through
recycling and other energy conservation measures. You have a responsibility to promptly report any
known or suspected violations of environmental laws or any events that may result in a discharge or
emission of hazardous materials. Employees whose jobs involve manufacturing have a special
responsibility to safeguard the environment. Such employees should be particularly alert to the
storage, disposal and transportation of waste, and handling of toxic materials and emissions into the
land, water or air. Health and Safety
The Company is committed not only to comply with all relevant health and safety laws, but also to
conduct business in a manner that protects the safety of its employees. All employees are required to
comply with all applicable health and safety laws, regulations and policies relevant to their jobs. If
you have a concern about unsafe conditions or tasks that present a risk of injury to you, please report
these concerns immediately to your supervisor or the Human Resources Department. 14
EMPLOYMENT PRACTICES
The Company pursues fair employment practices in every aspect of its business. The following is
intended to be a summary of our employment policies and procedures. Copies of the Company’s
detailed policies, including its Employee Handbook, are available from the Human Resources
Department. Company employees must comply with all applicable labor and employment laws,
including anti-discrimination laws and laws related to freedom of association, privacy, and collective
bargaining. It is your responsibility to understand and comply with the laws, regulations and policies
that are relevant to your job. Failure to comply with labor and employment laws can result in civil
and criminal liability against you and the Company, as well as disciplinary action by the Company, up
to and including termination of employment. You should contact the Legal Department or the Human
Resources Department if you have any questions about the laws, regulations and policies that apply to
you.
Harassment and Discrimination
The Company is committed to providing equal opportunity and fair treatment to all individuals on the
basis of merit, without discrimination because of race, color, religion, national origin, sex (including
pregnancy), sexual orientation, age, disability, veteran status or other characteristic protected by
law. The Company also prohibits harassment based on these characteristics in any form, whether
physical or verbal and whether committed by supervisors, non-supervisory personnel or nonemployees. Harassment may include, but is not limited to, offensive sexual flirtations, unwanted
sexual advances or propositions, verbal abuse, sexually or racially degrading words, or the display in
the workplace of sexually suggestive or racially degrading objects or pictures.
If you have any complaints about discrimination or harassment, report such conduct to your
supervisor or the Human Resources Department. All complaints will be treated with sensitivity and
discretion. Your supervisor, the Human Resources Department and the Company will protect your
confidentiality to the extent possible, consistent with law and the Company’s need to investigate your
concern. Where our investigation uncovers harassment or discrimination, we will take prompt
corrective action, which may include disciplinary action by the Company, up to and including
termination of employment. The Company strictly prohibits retaliation against an employee who, in
good faith, files a compliant.
Any member of management who has reason to believe that an employee has been the victim of
harassment or discrimination or who receives a report of alleged harassment or discrimination is
required to report it to the Human Resources Department immediately.
Alcohol and Drugs
The Company is committed to maintaining a drug-free work place. All Company employees must
comply strictly with Company policies regarding the abuse of alcohol and the possession, sale and use
of illegal substances. Drinking alcoholic beverages is prohibited while on duty or on the premises of
the Company, except at specified Company-sanctioned events. Possessing, using, selling or offering
illegal drugs and other controlled substances is prohibited
15
under all circumstances while on duty or on the premises of the Company. Likewise, you are
prohibited from reporting for work, or driving a Company vehicle or any vehicle on Company
business, while under the influence of alcohol or any illegal drug or controlled substance.
Violence Prevention and Weapons
The safety and security of Company employees is vitally important. The Company will not tolerate
violence or threats of violence in, or related to, the workplace. If you experience, witness or otherwise
become aware of a violent or potentially violent situation that occurs on the Company’s property or
affects the Company’s business you must immediately report the situation to your supervisor or the
Human Resources Department. The Company does not permit any individual to have weapons of any kind on Company property or in
vehicles, while on the job or off-site while on Company business. This is true even if you have
obtained legal permits to carry weapons. The only exception to this policy applies to security
personnel who are specifically authorized by Company management to carry weapons.
(NOTE: Please see the Company’s Employee Handbook for more information regarding the
Company’s policies and procedures with respect to its employment practices, approved employee
conduct and maintaining a safe and secure work environment.)
CONCLUSION
This Code contains general guidelines for conducting the business of the Company consistent with the
highest standards of business ethics. If you have any questions about these guidelines, please contact
your supervisor, the Human Resources Department or the Legal Department, or you may raise any
issues with the Ethics Helpline at a toll-free number posted in the Company’s offices or at the Ethics
Helpline’s website. The Company expects all of its employees and directors to adhere to these
standards. This Code, as applied to the Company’s principal financial officers, shall be our “code of ethics”
within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated
thereunder.
This Code and the matters contained herein are neither a contract of employment nor a guarantee of
continuing Company policy. The Company reserves the right to amend, supplement or discontinue
this Code and the matters addressed herein, without prior notice, at any time.
16
Exhibit 21.1
Subsidiaries of Leaf Group Ltd.
Subsidiaries
Demand Media Canada Corp.
Leaf Group Services, LLC
LS Media Holdings, LLC
Other Art Fairs Ltd
Other Art Fairs Australia Pty Ltd
Out of the Box S.A.
Saatchi Online, Inc.
Society6, LLC
Jurisdiction
British Columbia, Canada
Delaware
Delaware
England
Australia
Argentina
Delaware
Delaware
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-198492) and Form
S-8 (No. 333-172371) of Leaf Group Ltd. of our report dated February 23, 2017 relating to the financial statements and the
effectiveness of internal control over financial reporting, which appears in this Form 10‑K.
/s/PricewaterhouseCoopers LLP
Los Angeles, California
February 23, 2017
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Sean Moriarty, certify that:
1. I have reviewed this Annual Report on Form 10‑K of Leaf Group Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal controls over financial reporting (as defined in Exchange
Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
/s/ SEAN MORIARTY
Sean Moriarty
Chief Executive Officer
( Principal
Executive
Officer
)
Date: February 23, 2017
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Rachel Glaser, certify that:
1. I have reviewed this Annual Report on Form 10‑K of Leaf Group Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal controls over financial reporting (as defined in Exchange
Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
/s/ RACHEL GLASER
Rachel Glaser
Chief Financial Officer
( Principal
Financial
Officer
)
Date: February 23, 2017
Exhibit 32. 1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 of Leaf Group Ltd. (the
“Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sean Moriarty, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ SEAN MORIARTY
Sean Moriarty
Chief Executive Officer
( Principal
Executive
Officer
)
Date: February 23, 2017 This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange
Commission and is not to be incorporated by reference into any filing of Leaf Group Ltd. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K),
irrespective of any general incorporation language contained in such filing.
Exhibit 32. 2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 of Leaf Group Ltd. (the
“Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rachel Glaser, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ RACHEL GLASER
Rachel Glaser
Chief Financial Officer
( Principal
Financial
Officer
)
Date: February 23, 2017 This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange
Commission and is not to be incorporated by reference into any filing of Leaf Group Ltd. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K),
irrespective of any general incorporation language contained in such filing.