11. Acquisitions and Dispositions

Acquisitions

On May 1, 2017, we completed the acquisition of certain assets and the assumption of certain liabilities of Deny Designs, a print-on-demand home décor brand with in-house manufacturing capacity, and both wholesale and direct-to-consumer channels, for total consideration of $12.0 million. The purchase price consists of cash of approximately $6.7 million paid at closing, approximately 215,000 shares of Leaf Group common stock valued at approximately $1.7 million issued in a private placement, and contingent consideration of $3.6 million, payable annually in three equal installments on the first through third anniversary of the closing date, subject to reduction in certain circumstances. A portion of the contingent consideration will secure post-closing indemnification obligations of the seller and/or post-closing working capital adjustments to the purchase price. The business will operate as a part of our Marketplaces segment, complementing our Society6 business.

Purchase Price Allocation

The total fair value of the purchase price for the acquisition including cash paid at closing, fair value of common stock issued and contingent consideration approximated $11.3 million and was allocated to Deny Designs’ tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values as of May 1, 2017, the closing date of the acquisition. The excess of the purchase price over the net assets and liabilities acquired was recorded as goodwill. Our preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions, and are subject to change pending finalization of the valuation. The acquisition is included in our condensed consolidated financial statements as of the closing date of the acquisition, which was May 1, 2017.

The following table summarizes the allocation of the purchase price for Deny Designs, which is preliminary and subject to change pending finalization of the valuation (in thousands):


Goodwill	$	5,782
Trademark		2,350
Customer relationships		1,600
Artist relationships		300
Technology		600
Other assets and liabilities assumed		704
Total	$	11,336

The trademark, customer relationships, artist relationships, and technology we acquired have estimated useful lives of ten years, five years, three years, and three years, respectively. The estimated weighted average useful life of the intangible assets we acquired in total is seven years. Goodwill is primarily derived from our ability to generate synergies with Deny Designs’ products and services with our other marketplaces. The goodwill will be included as part of our marketplaces reporting unit and is expected to be deductible for tax purposes.

Contingent consideration is valued at $3.0 million as of the acquisition date based on time value, discount rate, and the estimated probability of achieving the contingent criteria related to the ongoing development of new products for sale, as specified in the purchase agreement. The minimum and maximum amount payable for each of the three years is $0.3 million and $1.2 million, respectively. Such amounts will be adjusted at each subsequent period based on probability of achievement until settlement of such liability. Adjustments to the liability will be recorded to income or expense in our condensed statement of operations. The contingent consideration liability is included in accrued expenses and other long-term liabilities in our condensed consolidated balance sheets.

Supplemental Pro forma Information (unaudited)

Supplemental information on an unaudited pro forma basis, as if the acquisition had been consummated as of January 1, 2016, is as follows (in thousands):


	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
Revenue	$	29,118	$	26,346	$	58,385	$	55,110
Net (loss) income		(8,995)		24,556		(19,037)		12,679

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 acquisitions. The pro forma results are not necessarily indicative of the results that have been realized had the acquisitions been consolidated as of the beginning of the periods presented.

Dispositions

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. 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 secure certain of our post-closing indemnification obligations. In July 2017, the full escrow amount of $3.9 million was released and paid to us following the expiration of the indemnification period. Revenue for the Cracked business for the three and six month periods ended June 30, 2016 (through the sale date of April 12, 2016) was $0.2 million and $1.8 million, respectively. The Cracked business had a pre-tax loss of $1.0 million and $1.9 million for the three and six month periods ended June 30, 2016 (through the sale date of April 12, 2016), respectively, excluding allocations for corporate costs and including stock-based compensation expense incurred in connection with the sale. Prior to its disposition, the operating results related to Cracked were included as part of our Media segment. 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. We utilized our net operating losses to offset any taxable gain resulting from the sale of the Cracked business.

In addition, during the six months ended June 30, 2016, we sold one of our non-core online properties for total consideration of $1.0 million, resulting in a gain of $1.0 million, recorded in other income, net.