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MARK > SEC Filings for MARK > Form 10-Q on 26-Nov-2012All Recent SEC Filings

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Form 10-Q for REMARK MEDIA, INC.


26-Nov-2012

Quarterly Report


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

The Company is relying on the Order of the Securities and Exchange Commission entered on November 14, 2012, in Release No. 68224 issued under the Securities and Exchange Act of 1934, providing regulatory relief to publicly traded companies affected by Hurricane Sandy, as our office housing certain of our accounting personnel located in the Union Square area of lower Manhattan lacked power, telephone and internet service as a result of Hurricane Sandy for seven
(7) days.

Cautionary Statement Regarding Forward-Looking Information

The following Management's Discussion and Analysis of our Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included as part of this Form 10-Q. Our disclosure and analysis in this report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business, the likelihood of our success in closing upon and achieving the desired benefits from the Banks.com Merger and our assumptions regarding the regulatory environment and international markets, include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as "expect," "anticipate," "intend," "plan," "believe," "estimate," "may" and similar expressions are forward-looking statements. Although these statements are based upon reasonable assumptions, they are subject to risks and uncertainties that are described more fully in our Annual Report on Form 10-K for the year ended December 31, 2011. These forward-looking statements represent our estimates and assumptions only as of the date of this filing and are not intended to give any assurance as to future results. As a result, undue reliance should not be placed on any forward-looking statements. We assume no obligation to update any forward-looking statements to reflect actual results, changes in assumptions or changes in other factors, except as required by applicable securities laws.

Business Overview and Recent Events

Remark Media, Inc. ("Remark Media" or the "Company") is a global digital media company focused on developing, owning and operating next-generation digital platforms that combine traditional web publishing and social media, with the goal of revolutionizing the way people search and exchange information over the Internet. The Company also offers a suite of content and platform services that provide its clients with opportunities to build consumer awareness, promote content engagement and foster brand-customer interactions.

The Company's current leading brands, BoWenWang (bowenwang.com.cn) and ComoTudoFunciona (hsw.com.br), provide readers in China and Brazil with thousands of articles about how the world around them works, serving as destinations for credible, easy-to-understand reference information. Remark Media is the exclusive digital publisher in China and Brazil for translated content from HowStuffWorks.com, a subsidiary of Discovery Communications, and in China for certain content from World Book, Inc., publisher of World Book Encyclopedia. The Company's website services business seeks to create innovative content and platform solutions for leading media and entertainment companies as well as Fortune 500 brands and boutique businesses. The solutions the Company offers center on helping clients generate value with the objective of maximizing content utilization, enhancing online engagement and customer experience and by driving online and offline actions. Remark Media is also a founding partner and developer of the U.S.-based product Sharecare, a highly searchable social Q&A healthcare platform organizing and answering health and medical questions. The Company generates revenue primarily through service and licensing fees as well as online advertising sales on its owned and operated websites.

The Company was incorporated in Delaware in March 2006 and is headquartered in Atlanta with additional operations in New York, Beijing and São Paulo.

On February 27, 2012, the Company entered into definitive equity financing agreements with accredited and institutional investors to raise funds in the amount of $4.25 million through a private placement. In connection with the transaction, the Company issued to investors common stock priced at $4.50 per share. Investors also received warrants to acquire shares of common stock at an exercise price of $6.81 per share, in the amount of 25% of the number of shares of common stock that the investors purchased. On February 29, 2012, the Company received $4.25 million in cash and issued to the investors a total of 944,777 shares of common stock and warrants to acquire an additional 236,194 shares of common stock.

On February 26, 2012, the Company entered into an agreement and plan of merger with Banks.com, Inc. ("Banks.com"), pursuant to which Banks.com becomes a wholly-owned subsidiary of Remark Media (the "Banks.com Merger"). Banks.com is a leading financial services portal operating a unique breadth and depth of financial products and services. Upon the closing of the merger on June 28, 2012, Remark Media issued approximately 702,267 shares of Common Stock to the shareholders of Bank.com, plus $300,000 in cash, as consideration for the merger. Also, on the effective date of the merger, the Company paid $131,250 in settlement of a promissory note in the amount of $125,000 which matured on June 28, 2012 and related unpaid interest.


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On November 13, 2012, the Company entered into a Services Agreement with TheStreet Inc. (Nasdaq: TST) ("TheStreet") in which Remark Media granted TheStreet an exclusive right to sell and serve advertisement and e-commerce on certain of Remark Media's personal finance websites. TheStreet will also support the websites by providing personal finance content, various promotion and advertisements on TheStreet's websites, and marketing and accounting support. Remark Media and TheStreet will share in the revenue generated by the partnership, after TheStreet recoups certain sales, marketing, editorial and operational costs. The Company expects the agreement to provide at least $0.9 million in proceeds over the next twelve months. A copy of the Services Agreement is filed with this report..

Our Strategy

Through 2011, we dedicated our resources mainly to the development and operations of Sharecare and our international businesses. At the start of 2012, our operating obligations to Sharecare came to an end and we made a strategic decision to shift our focus to the U.S. market which we believe holds larger near-term opportunity.

During the course of 2012, we have committed ourselves to the development and growth of new U.S.-based digital properties in the personal finance and consumer money markets category. To that end, we launched a new website DimeSpring and completed a merger with Banks.com in which we obtain ownership of Banks.com, IRS.com and Filelater.com. In an effort to accelerate awareness and revenue growth, on November 13, 2012, we entered into a strategic partnership with TheStreet.com. We also continue to seek engagements with 3rd parties to grow our Content and Platform Services, and have recently completed a consulting engagement with a Fortune 100 company.

The completion of our obligation to Sharecare in addition to our strategic shift resulted in the Company reporting minimal revenue for the three and nine months ended September 30, 2012, derived from our Brands segment. We continue to maintain an equity stake in Sharecare which we account for under the equity method of accounting.

Our Operations

Domestic

Brands. In September 2012, we launched DimeSpring.com, a U.S.-focused personal finance website that intends to utilize rich content and advice from a wide array of professionals to build a community of people interested in managing life's financial hurdles and opportunities. DimeSpring.com is part of a larger product strategy to leverage our experience and expertise to create leading destination websites that offer a dynamic online experience around a given topic with access to relevant content and subject matter experts. The Banks.com merger was successfully completed on June 28, 2012. Banks.com's revenue included in our consolidated statements of operations for the three and nine months ended September 30, 2012 was $278 thousand and $263 thousand, respectively. Assets obtained through the Banks.com Merger complement DimeSpring and serve to build a network of personal finance digital media businesses. We continue to invest in technology and product development to support this initiative, and more recently have entered into a services agreement with The Street.com to accelerate consumer awareness and revenue growth of these sites.

Content and Platform Services. Our agreements with Sharecare and Discovery expired in December 2011, and while we have entered into new service agreements, revenues from these agreements are not significant at this time. We do intend to expand our services business to new clients in 2013and we continue to invest in sales and evolve our technology platforms to ensure we incorporate the latest in social media and content trends.

Sharecare Investment. Although Remark Media is no longer providing services for Sharecare, the Company maintains equity ownership in the venture. As of September 30, 2012, we own approximately 10.9% of Sharecare's common stock and had representation on Sharecare's board of directors. We account for our investment in Sharecare under the equity method of accounting for investments and we record our proportionate share of Sharecare's net income or loss in our consolidated statements of operations under proportional share in income or loss from equity-method investments. In the case of a change of interest, we record a gain or loss in our consolidated statement of operations in the period the change of interest occurs. As of October 15, 2012, Sharecare and Remark Media no longer had a common board member. The Company is evaluating this event as it relates to the appropriate prospective accounting for its investment in Sharecare.

International

During 2011, we implemented certain cost-savings measures in our Brazil and China operations in connection with a strategic shift towards operations in the United States. We believe that the value of our international assets will be recognized over a longer term horizon, as online advertising markets develop for Brazil and China and the websites' traffic fundamentals improve.


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ComoTudoFunciona (http://hsw.com.br) is Brazil's online source for credible, unbiased and easy-to-understand explanations of how the world actually works. The Portuguese-language site is the exclusive digital publisher in Brazil of translated and localized content from the leading Discovery Communications brand HowStuffWorks, and is published from Remark Media's São Paulo operations. Revenue generated from our operations in Brazil was approximately $15 thousand and $24 thousand during the three months ended September 30, 2012 and 2011, respectively. Brazil revenues and operating results are included in the Brands reporting segment. We do not expect to see major growth in our Brazil operations in the near term unless we increase investment in the brand.

BoWenWang (http://www.bowenwang.com.cn) is an information and reference website that provides China with encyclopedic knowledge and easy-to-understand explanations of how the world works. The website is published from Beijing in the Chinese language. Launched in June 2008, BoWenWang features a combination of original content authored by the Company, translated and localized articles from the leading Discovery Communications brand HowStuffWorks, and content from World Book, Inc. As a result of our cost cutting measures implemented in China in September 2011, we experienced a decline in revenues in the third quarter of 2012 as compared to the same period of 2011. Revenue generated from our operations in China was minimal during the second quarter ended September 30, 2012. China revenues and operating results are included in the Brands reporting segment. We do not expect to see major growth in our China operations in the near term unless we increase investment in the brand.

Results of Operations

The following table sets forth our operations for the three and nine months ended September 30, 2012 and 2011:

                                      Three Months Ended September 30,       Nine Months Ended September 30,
                                           2012                2011              2012                2011


Operating revenue
Brands                              $         263,119     $      37,396    $        320,233     $     103,408
Content and platform services to
affiliates                                           -        1,172,883                    -        3,934,102
     Total revenue                            263,119         1,210,279             320,233         4,037,510

Operating expenses
Sales and marketing                           108,382               218             215,542            14,517
Content, technology and
development                                   608,244           863,593           1,307,259         3,082,743
General and administrative                  1,328,844         1,349,292           3,583,020         3,950,147
Impairment loss                                      -          381,000                    -          381,000
Depreciation and amortization
expense                                       149,689            73,973             202,213           203,163
     Total operating expenses               2,195,159         2,668,076           5,308,034         7,631,570

Loss from operations                       (1,932,040)       (1,457,797)         (4,987,801)       (3,594,060)

Other income (expense)
Interest expense                              (11,505)          (37,075)            (38,630)          (86,443)
Other income                                  (14,876)           95,409              (7,769)           96,630
Total other income (expense)                  (26,381)           58,334             (46,399)           10,187

Loss before gain (loss) from
equity-method                              (1,958,421)       (1,399,463)         (5,034,200)       (3,583,873)
investments
Proportional share in loss of
equity-method investments                    (739,704)       (1,143,499)         (2,553,086)       (1,624,950)
Change of interest gain of
equity-method investments                            -          407,376           2,494,990           407,376

Net loss                            $      (2,698,125)    $  (2,135,586)   $     (5,092,296)    $  (4,801,447)

Segment Data


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We monitor and analyze our financial results on a segment basis for reporting and management purposes, as presented in Note 5 to the accompanying condensed consolidated financial statements. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and assess performance.

Our Brands segment consists of our websites in Brazil and China and generates revenues from advertisers based in the respective countries. This segment also includes the businesses acquired through the recent Banks.com's acquisition completed on June 28, 2012. The operating results for services performed under the Sharecare and Discovery services agreements are included in the Content and Platform Services segment.

Revenue

Total revenue for the three months ended September 30, 2012 was approximately $263 thousand, a decrease of approximately $0.9 million from the same period in 2011. For the nine months ended September 30, 2012 and 2011, revenue was $320 thousand, a decrease of $3.7 million as compared to the same period of 2011. All revenue generated in the three and nine months ended Sept 30, 2012 was related to the Brands segment, while 97% of our revenue in the three and none months ended September 30, 2011 was generated from the Content and Platform Services segment. The major decrease was due to the fact that all of our content and platform service agreements expired in December 2011 and we did not renew or enter into any significant revenue generating service agreements with our customers under the Content and Platform Services segment. Also, pursuant to closing of the Banks.com merger on June 28, 2012, we recorded $278 thousand of Banks.com revenues in our statements of operations for the nine months ended September 30, 2012.

Sales and Marketing

We have been and will continue to focus on sales and marketing to support our growth initiatives. Going forward, for our domestic assets, we are participating in a strategic advertising sales partnership with The Street. Sales and marketing expenses were $108 thousand and $216 thousand in the three months ending September 30, 2012 and 2011, respectively, and $216 thousand and $15 thousand in the nine months ended September 30, 2012 and 2011, respectively.

Content, technology and development

Content, technology and development expenses include the ongoing third- party costs to acquire original content, translate and localize content for our Brands segment from English to Portuguese and Chinese, as well as costs of designing and developing our products as well as expenses to support our Content and Platform Services segment including labor, content and third party platform support services. These expenses were $0.6 million and $0.9 million in the three months ended September 30, 2012 and 2011 , respectively and $1.3 million and $3.1 million in the nine months ended September 30, 2012 and 2011, respectively. The decrease is related to web developments costs which were capitalized during the three and nine months ended Sept 30, 2012 of $0.2 million and $0.6 million, respectively in addition to the decrease in the services provided to customers in the content and platform services segment.

General and Administrative Expenses

Our total general and administrative expenses were approximately $1.3 million and $1.3 million in the three months ended September 30, 2012 and 2011, respectively and $3.6 million and $4.0 million in the nine months ended September 30, 2012 and 2011, respectively.

Interest Expense

Interest expense for the three months ended September 30, 2012 and 2011 was $12 thousand and $37 thousand, respectively and $39 thousand and $86 thousand for the nine months ended September 30, 2012 and 2011, respectively. These amounts reflect the amortization of debt issuance costs in connection with our revolving credit facility entered into in March 2011 which expired in March 2012. The debt issuance costs were fully amortized in the first quarter of 2012.

Loss from Equity-Method Investments and Change of Interest Gain

We account for our investment in Sharecare under the equity method of accounting. Sharecare issued additional equity in the first and second quarters of 2012. As a result, we recorded a gain of $2.5 million in the nine months ended September 30, 2012. Additionally, we recorded a loss of $0.7 million in the three months ended September 30, 2012, and 2011, respectively and $2.6 million and $1.6 million in the nine months ended September 30, 2012 and 2011, respectively. These losses represent our share in Sharecare's loss during those periods. At September 30, 2012, our percentage ownership in Sharecare was 10.9%. We continually


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evaluate the facts and circumstances related to our investment in Sharecare to assess the need for change in our accounting method in future periods.

Recent Accounting Pronouncements

Recent accounting pronouncements are summarized in Note 2 to the accompanying notes to the condensed consolidated financial statements.

Liquidity and Capital Resources

Cash and cash equivalents was $0.7 million at September 30, 2012, compared to $1.5 million at December 31, 2011. The decrease in cash is primarily due to the proceeds provided through the equity funding completed in February 2012 offset by use of cash to fund our operating and investing activities, including website development costs and the acquisition of Banks.com . Our cash on hand at September 30, 2011 was $2.6 million.

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