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TST > SEC Filings for TST > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for THESTREET, INC.

Form 10-Q for THESTREET, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Special Note Regarding Forward-Looking Statements - all statements contained in this quarterly report on Form 10-Q (the "Report") that are not descriptions of historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are inherently subject to risks and uncertainties, and actual results could differ materially from those reflected in the forward-looking statements due to a number of factors, which include, but are not limited to, the factors set forth under the heading "Risk Factors" and elsewhere in this Report, and in other documents we file with the Securities and Exchange Commission from time to time, including, without limitation, the Company's annual report on Form 10-K for the year ended December 31, 2011 ("2011 Form 10-K"). Certain forward-looking statements may be identified by terms such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "forecasts," "potential," or "continue" or similar terms or the negative of these terms. All statements relating to our plans, strategies and objectives are deemed forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The forward-looking statements speak only as of the date of the filing of this Report; we have no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise.


The following discussion and analysis should be read in conjunction with the Company's unaudited condensed consolidated financial statements and notes thereto.

Overview

TheStreet, Inc., together with its wholly owned subsidiaries ("TheStreet", "we", "us" or the "Company"), is a leading digital financial media company whose collection of digital services provides users, subscribers and advertisers with a variety of content and tools through a range of online, social media, tablet and mobile channels. Our mission is to provide actionable ideas from the world of investing, finance and business in order to break down information barriers, level the playing field and help all individuals and organizations grow their wealth. With a robust suite of digital services, TheStreet offers the tools and insights needed to make informed decisions about earning, investing, saving and spending money. Since its inception in 1996, TheStreet believes it has distinguished itself from other financial media companies with its journalistic excellence, unbiased approach and interactive multimedia coverage of the financial markets, economy, industry trends, investment and financial planning.

On September 11, 2012, we acquired The Deal, LLC, a digital platform that delivers sophisticated coverage of the mergers and acquisitions environment, primarily through The Deal Pipeline, a leading provider of transactional information services. The Deal Pipeline was created for organizations seeking to generate deal flow, improve client intelligence and enhance market knowledge and provides full access to 100-plus pieces of proprietary commentary, analysis and data produced every day by The Deal's editors. We believe this acquisition will advance our strategic objectives by increasing both subscribers and content. We believe that The Deal's marquee customer base of 40,000 professionals, including senior-level bankers, law firm partners, private equity partners and hedge fund notables, will provide us with an additional source of recurring revenue with high renewals and attractive margins. The purchase price was approximately $5.8 million, of which $0.6 million was placed in escrow to secure indemnity obligations and we assumed net liabilities approximating $5.0 million.

Our business operations were recently disrupted by super storm Sandy, which had a significant impact on the Northeast. Our headquarters are located on Wall Street in New York City and we were unable to access our offices for several days. The NYSE was closed for two full trading days due to the storm which also had an impact on other financial services companies located in the Northeast and elsewhere. Although we maintain business interruption insurance which may cover a portion of the losses incurred by us during this time, there is no assurance that it will do so and there may be secondary effects of the storm on our business in the fourth quarter.

We report revenue in two categories: subscription services and media. Subscription services, previously referred to as premium services, is comprised of subscriptions, licenses and fees for access to securities investment information, rate services and transactional information pertaining to the mergers and acquisitions environment. Media, previously referred to as marketing services, is comprised of fees charged for the placement of advertising and sponsorships within our services.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are deemed to be necessary. Significant estimates made in the accompanying condensed consolidated financial statements include, but are not limited to, the following:

incentive cash compensation,
useful lives of intangible assets,
useful lives of fixed assets,
the carrying value of goodwill, intangible assets and marketable securities,
allowances for doubtful accounts and deferred tax assets,
accrued expense estimates,
reserves for estimated tax liabilities,
estimates in connection with the allocation of the purchase price of The Deal, LLC to the fair value of the assets acquired and liabilities assumed,
certain estimates and assumptions used in the calculation of the fair value of equity compensation issued to employees, and
restructuring charges.


We perform annual impairment tests of goodwill and other intangible assets with indefinite lives at the end of the third quarter of each year or when circumstances arise that indicate a possible impairment might exist. Based upon an annual impairment test performed as of September 30, 2012, no impairment was indicated as the Company's fair value exceeded its book value by approximately 13%. The fair value of the Company's goodwill was estimated using a market approach, based upon actual prices of the Company's Common Stock and the estimated fair value of the Company's outstanding Preferred Shares. The fair value of the Company's outstanding Preferred Shares requires significant judgments, including the estimation of the amount of time until a liquidation event occurs as well as an appropriate cash flow discount rate. Further, in assigning a fair value to the Company's Preferred Stock, the Company also considered that the preferred shareholders are entitled to receive a $55 million liquidation preference upon liquidation or dissolution of the Company or upon any change of control event. Additionally, the holders of the Preferred Shares are entitled to receive dividends and to vote as a single class together with the holders of the Common Stock on an as-converted basis and provided certain preferred share ownership levels are maintained, are entitled to representation on the Company's board of directors and may unilaterally block issuance of certain classes of capital stock, the purchase or redemption of certain classes of capital stock, including Common Stock (with certain exceptions) and any increases in the per-share amount of dividends payable to the holders of the Common Stock. A decrease in the price of the Company's Common Stock, or changes in the estimated value of the Company's preferred shares, could materially affect the determination of the fair value and could result in an impairment charge to reduce the carrying value of goodwill, which could be material to the Company's financial position and results of operations.

During 2011 and the three months ended March 31, 2012, the Company accrued quarterly expenses related to its full year cash incentive compensation on a straight-line basis based on the Company's estimate of expected full year cash incentive compensation. Beginning with the three months ended June 30, 2012, the Company accrued cash incentive compensation expense based upon achievement of periodic performance objectives and full year expectations.

A summary of our critical accounting policies and estimates can be found in our 2011 Form 10-K.

Results of Operations

Comparison of Three Months Ended September 30, 2012 and September 30, 2011

     Revenue


                                For the Three Months Ended September 30,
                        ---------------------------------------------------------
                                             Percent                     Percent
                                             of Total                   of Total     Percent
                              2012           Revenue         2011        Revenue     Change
                        ----------------    ----------   ------------   ---------   ---------
Revenue:
Subscription services   $      9,101,050            78 % $  9,994,184          70 %        -9 %
Media                          2,496,705            22 %    4,346,907          30 %       -43 %
                        -- -------------    --- ------   - ----------   -- ------
Total revenue           $     11,597,755           100 % $ 14,341,091         100 %       -19 %
                        -- -------------    --- ------   - ----------   -- ------

Subscription services. Subscription service revenue is comprised of subscriptions, licenses and fees for access to securities investment information, rate services and transactional information pertaining to the mergers and acquisitions environment. Revenue is recognized ratably over the contract period.

Subscription services revenue for the three months ended September 30, 2012 decreased by 9% when compared to the three months ended September 30, 2011. This decrease is primarily the result of an 18% decrease in the weighted-average number of subscriptions during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, partially offset by an 8% increase in the average revenue recognized per subscription during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, combined with approximately $0.4 million of revenue related to the operations of The Deal, LLC ("The Deal"), which was acquired on September 11, 2012. The decrease in the weighted-average number of subscriptions during the period is primarily the result of reduced acquisitions of new subscribers to our products. The increase in the average revenue recognized per subscription during the period is primarily the result of the mix of products sold and higher product pricing.

Media. Media revenue is comprised of fees charged for the placement of advertising and sponsorships within our services.

Media revenue for the three months ended September 30, 2012 decreased by 43% when compared to the three months ended September 30, 2011. The decrease in media revenue was primarily the result of reduced demand from both repeat advertisers as well as new advertisers.


     Operating Expense


                                       For the Three Months Ended September 30,
                          ------------------------------------------------------------------
                                                 Percent                          Percent
                                                of Total                          of Total        Percent
                                2012             Revenue           2011           Revenue         Change
                          ----------------    -------------    -------------    ------------    -----------
Operating expense:
Cost of services          $      5,699,275               49 %  $   6,274,741              44 %           -9 %
Sales and marketing              2,717,794               23 %      4,640,908              32 %          -41 %
General and
administrative                   3,143,160               27 %      3,750,475              26 %          -16 %
Depreciation and
amortization                     1,295,197               11 %      1,326,484               9 %           -2 %
Restructuring and
other charges                    3,046,104               26 %              -               -            N/A
Gain on disposition of
assets                              14,011                0 %              -               -            N/A
                          -- -------------                     -- ----------
Total operating
expense                   $     15,915,541                     $  15,992,608                             -0 %
                          -- -------------                     -- ----------

Cost of services. Cost of services expense includes compensation, benefits, outside contributor costs related to the creation of our content, licensed data and the technology required to publish our content.

Cost of services expense decreased by approximately $0.6 million, or 9%, over the periods. The decrease was primarily the result of reduced compensation expense due to a 34% decrease in average headcount (excluding the impact of headcount of The Deal), combined with lower costs related to data used on the Company's Web sites and computer services and supplies, the aggregate of which decreased by approximately $1.4 million. These cost decreases were partially offset by increased revenue share payments made to certain distribution partners, the use of nonemployee content providers, as the company has shifted its strategy more towards a contributor/freelance model with fewer full time editorial staff, as well as costs associated with the operations of The Deal since its acquisition, the aggregate of which increased by approximately $0.9 million. Although the dollar amount of cost of services expense decreased over the periods, cost of services expense as a percentage of revenue increased to 49% in the three months ended September 30, 2012, from 44% in the prior year period, as our cost cutting initiatives did not completely offset the decline in revenue.

Sales and marketing. Sales and marketing expense consists primarily of compensation expense for the direct sales force, marketing services, and customer service departments, advertising and promotion expenses and credit card processing fees.

Sales and marketing expense decreased by approximately $1.9 million, or 41%, over the periods. The decrease was primarily the result of reduced compensation expense due to a 32% decrease in average headcount (excluding the impact of headcount of The Deal) combined with lower advertising and promotion related spending, recruiting fees and travel and entertainment costs, the aggregate of which decreased by approximately $2.1 million. These cost decreases were partially offset by increased advertisement serving costs and consulting fees, as well as costs associated with the operations of The Deal since its acquisition, the aggregate of which increased by approximately $0.3 million. Sales and marketing expense includes approximately $0.0 million and $0.1 million of barter expense in the three month periods ended September 30, 2012 and 2011, respectively. Sales and marketing expense as a percentage of revenue decreased to 23% in the nine months ended September 30, 2012, from 32% in the prior year period resulting from our cost cutting initiatives.

General and administrative. General and administrative expense consists primarily of compensation for general management, finance and administrative personnel, occupancy costs, professional fees, insurance and other office expenses.

General and administrative expense decreased by approximately $0.6 million, or 16%, over the periods. The decrease was primarily the result of reduced compensation expense due to a 20% decrease in average headcount (excluding the impact of headcount of The Deal), combined with lower professional fees and occupancy costs, the aggregate sum of which decreased by approximately $1.1 million. These cost decreases were partially offset by increased costs related to the Company's acquisition and subsequent operation of The Deal since its acquisition, the aggregate of which increased by approximately $0.5 million. General and administrative expense as a percentage of revenue increased to 27% in the three months ended September 30, 2012, from 26% in the prior year period as our cost cutting initiatives did not completely offset the decline in revenue.


Depreciation and amortization. Depreciation and amortization expense decreased by approximately $0.0 million, or 2%, over the periods. Depreciation and amortization expense as a percentage of revenue increased to 11% in the three months ended September 30, 2012, from 9% in the prior year period.

Restructuring and other charges. In March 2012, the Company began a targeted reduction in force and committed to terminate use of certain vendor services and assets reflecting previously capitalized costs. The actions were taken after a review of the Company's cost structure with the goal of better aligning the cost structure with the Company's revenue base. These restructuring efforts continued through the third quarter of 2012 resulting in restructuring and other charges from continuing operations of approximately $0.2 million during the three months ended September 30, 2012. Additionally, as a result of the Company's acquisition of The Deal, the Company discontinued the use of The Deal's office space and implemented a reduction in force to eliminate redundant positions, resulting in restructuring and other charges from continuing operations of approximately $3.2 million during the three months ended September 30, 2012. These activities were offset by a reduction to previously estimated restructuring and other charges resulting in a net credit of approximately $0.3 million.

     Net Interest Income


                         For the Three Months Ended
                               September 30,
                      --------------------------------    Percent
                          2012              2011          Change
                      -------------    ---------------   ---------
Net interest income   $      91,271    $       155,123         -41 %
                      -- ----------    -- ------------

The decrease in net interest income is primarily the result of lower interest rates on bank deposits combined with reduced cash balances.

Net Loss

Net loss for the three months ended September 30, 2012 totaled approximately $4.2 million, or $0.13 per basic and diluted share, compared to net loss totaling approximately $1.5 million, or $0.05 per basic and diluted share, for the three months ended June 30, 2011. The increase in the net loss is largely the result of restructuring and other charges recorded during the three months ended September 30, 2012 that approximated $3.0 million. Net loss for the three months ended September 30, 2012 also included a net loss of approximately $0.1 million related to the operations of The Deal since its acquisition.

Comparison of Nine Months Ended September 30, 2012 and September 30, 2011

     Revenue


                                For the Nine Months Ended September 30,
                        --------------------------------------------------------
                                            Percent                     Percent
                                            of Total                   of Total     Percent
                             2012           Revenue         2011        Revenue     Change
                        ---------------    ----------   ------------   ---------   ---------
Revenue:
Subscription services   $    27,140,853            74 % $ 29,678,616          68 %        -9 %
Media                         9,753,885            26 %   13,812,144          32 %       -29 %
                        -- ------------    --- ------   - ----------   -- ------
Total revenue           $    36,894,738           100 % $ 43,490,760         100 %       -15 %
                        -- ------------    --- ------   - ----------   -- ------


Subscription services. Subscription services revenue for the nine months ended September 30, 2012 decreased by 9% when compared to the nine months ended September 30, 2011. This decrease is primarily the result of a 15% decrease in the weighted-average number of subscriptions during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, partially offset by a 7% increase in the average revenue recognized per subscription during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, combined with approximately $0.4 million of revenue related to the operations of The Deal since its acquisition. The decrease in the weighted-average number of subscriptions during the period is primarily the result of reduced acquisitions of new subscribers to our products. The increase in the average revenue recognized per subscription during the period is primarily the result of the mix of products sold and higher product pricing.

Media. Media revenue for the nine months ended September 30, 2012 decreased by 29% when compared to the nine months ended September 30, 2011. The decrease in media revenue was primarily the result of reduced demand from both repeat advertisers as well as new advertisers.

     Operating Expense


                                       For the Nine Months Ended September 30,
                          -----------------------------------------------------------------
                                                 Percent                         Percent
                                                of Total                         of Total        Percent
                                2012             Revenue           2011          Revenue         Change
                          ----------------    -------------    ------------    ------------    -----------
Operating expense:
Cost of services          $     17,834,336               48 %  $ 20,036,270              46 %          -11 %
Sales and marketing             10,076,902               27 %    13,122,182              30 %          -23 %
General and
administrative                  10,242,852               28 %    12,159,579              28 %          -16 %
Depreciation and
amortization                     3,740,649               10 %     4,492,525              10 %          -17 %
Restructuring and
other charges                    6,039,797               16 %             -               -            N/A
Gain on disposition of
assets                            (205,989 )             -1 %             -               -            N/A
                          -- -------------                     - ----------
Total operating
expense                   $     47,728,547                     $ 49,810,556                             -4 %
                          -- -------------                     - ----------

Cost of services. Cost of services expense decreased by approximately $2.2 million, or 11%, over the periods. The decrease was primarily the result of reduced compensation expense due to a 23% decrease in average headcount (excluding the impact of headcount of The Deal), combined with lower costs related to computer services and supplies, data used on the Company's Web sites and consulting fees, the aggregate of which decreased by approximately $3.3 million. These cost decreases were partially offset by increased costs related to revenue share payments made to certain distribution partners, the use of nonemployee content providers, as the company has shifted its strategy more towards a contributor/freelance model with fewer full time editorial staff, as well as costs associated with the operations of The Deal since its acquisition, the aggregate of which increased by approximately $1.1 million. Although the dollar amount of cost of services expense decreased over the periods, cost of services expense as a percentage of revenue increased to 48% in the nine months ended September 30, 2012, from 46% in the prior year period, as our cost cutting initiatives did not completely offset the decline in revenue.

Sales and marketing. Sales and marketing expense decreased by approximately $3.0 million, or 23%, over the periods. The decrease was primarily the result of reduced compensation expense due to a 16% decrease in average headcount (excluding the impact of headcount of The Deal), combined with reductions in advertising and promotion related spending, travel and entertainment costs, credit card processing fees, recruiting charges and public relations costs, the aggregate of which decreased by approximately $3.3 million. These cost decreases were partially offset by costs associated with the operations of The Deal since its acquisition as well as increased advertisement serving costs, the aggregate of which increased by approximately $0.2 million. Sales and marketing expense includes approximately $0.1 million and $0.2 million of barter expense in the nine month periods ended September 30, 2012 and 2011, respectively. Sales and marketing expense as a percentage of revenue decreased to 27% in the nine months ended September 30, 2012, from 30% in the prior year period resulting from our cost cutting initiatives.


General and administrative. General and administrative expense decreased by approximately $1.9 million, or 16%, over the periods. The decrease was primarily the result of reduced compensation expense due to a 14% decrease in average headcount (excluding the impact of headcount of The Deal), combined with lower professional fees (inclusive of those relating to a review of certain accounting matters in our former Promotions.com subsidiary), occupancy, training and consulting costs, the aggregate sum of which decreased by approximately $2.3 million. These cost decreases were partially offset by increased recruiting fees, combined with costs related to the Company's acquisition and subsequent operation of The Deal since its acquisition, the aggregate of which increased by approximately $0.5 million. General and administrative expense as a percentage of revenue approximated 28% in the nine months ended September 30, 2012, the same as in the prior year period, as our cost cutting initiatives were offset by the decline in revenue. . . .
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