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MARK > SEC Filings for MARK > Form 10-K on 15-Apr-2013All Recent SEC Filings

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Form 10-K for REMARK MEDIA, INC.


15-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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-K. 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 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. 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 Developments

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's international emerging market 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 and 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 Las Vegas, Miami, Beijing and Sao Paulo.

On December 30, 2011, the Company changed its name to Remark Media, Inc. The name Remark Media reflects the Company's continued dedication to rich, high-quality content, its commitment to deep social media engagement, and its core belief that uniting remarkable content and remarkable people leads to value-added exchanges of information and enriched connections with others. The Company amended and restated its Certificate of Incorporation with the Delaware Secretary of State to reflect its name change. Effective January 3, 2012, the ticker symbol for the Company's common stock traded on the NASDAQ Capital Market changed from "HSWI" to "MARK", and the CUSIP for the Company's common stock changed from "40431N104" to "75954W107".

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 became 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.

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 support. The Company expects the agreement to provide at least $0.9 million over the initial term of the agreement. The Company had a receivable from TheStreet of $0.2 million at December 31, 2012, which was included in prepaid and other assets in the accompanying consolidated balance sheet.

On November 23, 2012, the Company entered into a $1.8 million Term Loan Agreement, at a 6.67% annual interest rate with a lender controlled by and in part owned by Mr. Kai-Shing Tao, the Company's Chairman and Chief Executive Officer. Mr. Tao has been a director of the Company since 2007. The Term Loan is secured by substantially all the tangible and intangible assets of the Company, excluding its shares of common stock of Sharecare. The principal and accrued interest under the Term Loan Agreement is convertible into Common Stock of the Company at the rate of $1.30 per share, which represents an approximately 33% premium to the average closing prices of the Company's common stock for the ten days prior to entrance into the agreement and an approximately 53% premium to the closing price of the Company's common stock on the day of entrance into the agreement. This Term Loan Agreement was approved by the Audit Committee of the


Board, which believes the related party transaction was negotiated as an arms-length transaction. The full balance is due November 2014.

On March 29, 2013, Remark Media acquired Pop Factory, LLC, the owner and operator of Bikini.com, a digital beach lifestyle brand providing websites, branded merchandise, and mobile content, for total cash consideration of $2,375,000. In connection with the purchase, the two founders, who had remained executives of Pop Factory, entered into one year employment agreements with Pop Factory and noncompetition agreements with the Company.

On April 2, 2013, the Company entered into a $4.0 million Senior Secured Convertible Promissory Note ("Promissory Note"), at a 6.67% annual interest rate for the first year and 8.67% for the second year, with a lender controlled by and in part owned by Mr. Kai-Shing Tao, the Company's Chairman and Chief Executive Officer. The Promissory Note is secured pursuant to the Term Loan Agreement detailed above, as amended by Amendment Number One ("Amendment") to that Term Loan Agreement, dated April 2, 2013. The principal and accrued interest under the Promissory Note is convertible into Common Stock of the Company at the rate of $2.00 per share, which represents an approximately 11% premium to the average closing prices of the Company's common stock for the ten days prior to entrance into the agreement and an approximately 8% premium to the closing price of the Company's common stock on the day of entrance into the agreement. This Promissory Note and Amendment were approved by the Audit Committee of the Board, which believes the related party transaction was negotiated as an arms-length transaction. The proceeds from this Promissory Note and Amendment was used to acquire Pop Factory and will be used to fund future acquisitions and the ongoing operations of the business, in conjunction with revenue growth in the Brands segment. The full balance is due April 2015.

Our Strategy

During 2012, we focused on the development and growth of our personal finance digital media vertical. We launched DimeSpring, a new website combining high-quality, credible content with an expert community, and acquired Banks.com, Inc., which brought us the portfolio of personal finance properties including Banks.com, IRS.com, FileLater.com, and MyStockFund.com. In an effort to accelerate awareness and revenue growth of our new personal finance businesses, on November 13, 2012, we entered into a strategic partnership with TheStreet.com.

In 2013, we are focusing on creating an 18-to-34 year old lifestyle digital medial vertical, and commenced the development in March 2013 with the acquisition of Pop Factory, the owner and operator of Bikini.com. We intend to redevelop the brand and website, and continue to acquire other complimentary digital media properties.

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. Assets obtained through the Banks.com Merger complement DimeSpring and serve to build a network of personal finance digital media businesses. These include Banks.com, the US Tax Center at www.irs.com, FileLater, and MyStockFund. 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 entered into new service agreements, revenues from these agreements were not significant. We do not intend to expand our services business, while we continue to focus on developing the personal finance and 18-to-34 year old lifestyle verticals in our Brands business.

Sharecare Investment. Although Remark Media is no longer providing services for Sharecare, the Company maintains equity ownership in the venture. As of December 31, 2012, we own approximately 10.8% of Sharecare's common stock and had representation on Sharecare's board of directors. Through November 30, 2012, the Company accounted for its equity interest in Sharecare under the equity method of accounting. Under this method, the Company recorded its proportionate share of Sharecare's net income or loss based on Sharecare's financial results. As of December 1, 2012, the Company moved to the cost method of accounting due to a lower percentage of ownership (10.8% as of December 1, 2012), nonparticipation in policy-making processes, and limited existence of technology dependency. Remark Media owned approximately 10.8% of the outstanding common stock of Sharecare as of December 31, 2012.


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. In the near term, we believe our resources can be better applied to developing and establishing new brands and expanding our services business in the United States; and as a result, are managing our costs in Brazil and China while evaluating our opportunities.

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. We recognized approximately $0.07 million and $0.1 million of revenue from Brazil during the twelve months ended December 31, 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. Revenue generated from the operations based in China was approximately $0.003 million and $0.03 million during the twelve months ended December 31, 2012 and 2011, respectively. We performed an impairment assessment of the license to operate in China, which is an indefinite-lived intangible asset. As a result of the assessment, we recorded an impairment loss of $0.4 million in our statement of operations for the third quarter ended September 30, 2011. 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 - Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

The following table sets forth our consolidated results of operations for the years ended December 31, 2012 and 2011.

                                                 December 31, 2012      December 31, 2011

Operating revenue
Brands                                          $          500,890     $          140,702
Content and platform services from affiliates                     -             4,851,224
Total revenue                                              500,890              4,991,926

Operating expenses

Sales and Marketing                                         91,467                 19,225
Content, technology and development                         75,720              3,187,379
General and administrative (including                    6,150,269              5,900,771
stock-based compensation expense of $826,008
and $615,367 in 2012 and 2011, respectively)

Impairment Loss                                            412,979                381,000
Depreciation and amortization                              232,574                220,327
Total operating expenses                                 6,963,009              9,708,702

Operating loss                                          (6,462,119)            (4,716,776)

Other income
Other expense                                              (64,838)              (123,480)
Other income                                                12,970                  6,769
Total other income                                         (51,868)              (116,711)

Loss from operations before equity in loss of           (6,513,987)            (4,833,487)
equity method investment

Change of interest gain of equity-method                 2,494,990                407,376
investment
Proportional share in loss of equity-method             (2,948,206)            (2,473,659)
investment
                                                          (453,216)            (2,066,283)

Loss before benefit from income taxes                   (6,967,203)            (6,899,770)

Income tax (benefit) expense                                 1,531                (95,250)

Net loss                                        $       (6,968,734)    $       (6,804,520)

Net loss per share
Net loss per share, basic and diluted           $            (1.05)    $            (1.26)

Basic and diluted weighted average shares                6,605,563              5,416,109
outstanding


Segment Data

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.

Revenues

For the twelve months ended December 2012 and 2011, we generated revenue of $0.5 million and $5.0 million respectively, of which 100% was generated from our Brands segment for 2012 and 97% was generated from our Content and Platform services segment for 2011. The decrease in revenue is primarily attributable to the elimination of the services provided to Sharecare and Discovery during 2012 as compared to 2011, as the services agreements with Sharecare and Discovery concluded in December 2011, and we did not renew or enter into new agreements in the Content and Platform segment. Sharecare and Discovery are related parties and the related revenues are included in our consolidated statements of operations under Content and Platform Services from affiliates.

Our Brands segment is comprised of revenue generated from our owned and operated websites, including international website businesses based in Brazil and China. Revenue generated on the two websites relate primarily to paid-for-impression and pay-per-performance ads.

Also, pursuant to closing of the Banks.com merger on June 28, 2012, we recorded $0.4 million of Banks.com revenues in our statements of operations for the year ending December 31, 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 $91 thousand and $19 thousand for the years ended December 31, 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. Content, technology and development expenses were $0.08 million and $3.2 million for the years ended December 31, 2012 and 2011, respectively. The decrease is related to web developments costs, 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 $6.2 million and $5.9 million for the years ended December 31, 2012 and 2011, respectively. The increase was primarily due to an increase in personnel expenses and facilities expense. As discussed in Item 1 above, the Company has taken steps to reduce costs, including personnel costs, which were realized in the later part of 2012 and will be realized going forward.

Impairment Loss

Impairment loss was $0.4 million in each of the years ending December 31, 2012 and 2011. The loss for the year ended December 31, 2012 was due to the Company's abandonment of certain projects in the Content and Platform Services business.


Depreciation and Amortization

Depreciation and amortization expense was $0.2 million for each of the years ended December 31, 2012 and 2011. The expense in the year ended December 31, 2012 was due to amortization from the Banks.com acquisition, offset by a decrease in depreciation.

Interest Expense

Interest expense for the year ending December 31, 2012 and 2011 was $65 thousand and $123 thousand, 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 accounted for our investment in Sharecare under the equity method of accounting through November 2012. In December, the Company moved to the cost method of accounting (see Note 2). Under the equity method through November 2012, we recorded a loss of $0.4 million. For the year ended December 31, 2011, we recorded a loss of $2.1 million. These losses represent our share in Sharecare's loss during those periods, which was offset by the change in interest gain.

Liquidity and Capital Resources

Our cash balance was approximately $1.4 million as of December 31, 2012, a decrease of approximately $0.1 million over our cash balance as of December 31, 2011.

On November 23, 2012, the Company entered into a $1.8 million Term Loan Agreement, at a 6.67% annual interest rate with a lender controlled by and in part owned by Mr. Kai-Shing Tao, the Company's Chairman and Chief Executive Officer. Mr. Tao has been a director of the Company since 2007. The Term Loan is secured by substantially all the tangible and intangible assets of the Company, excluding its shares of common stock of Sharecare. The principal and accrued interest under the Term Loan Agreement is convertible into Common Stock of the Company at the rate of $1.30 per share, which represents an approximately 33% premium to the average closing prices of the Company's common stock for the ten days prior to entrance into the agreement and an approximately 53% premium to the closing price of the Company's common stock on the day of entrance into the agreement. This Term Loan Agreement was approved by the Audit Committee of the Board, which believes the related party transaction was negotiated as an arms-length transaction. The full balance is due November 2014.

On April 2, 2013, the Company entered into a $4.0 million Senior Secured Convertible Promissory Note ("Promissory Note"), at a 6.67% annual interest rate for the first year and 8.67% for the second year, with a lender controlled by and in part owned by Mr. Kai-Shing Tao, the Company's Chairman and Chief Executive Officer. The Promissory Note is secured pursuant to the Term Loan Agreement detailed above, as amended by Amendment Number One ("Amendment") to that Term Loan Agreement, dated April 2, 2013. The principal and accrued interest under the Promissory Note is convertible into Common Stock of the Company at the rate of $2.00 per share, which represents an approximately 11% premium to the average closing prices of the Company's common stock for the ten days prior to entrance into the agreement and an approximately 8% premium to the closing price of the Company's common stock on the day of entrance into the agreement. This Promissory Note and Amendment were approved by the Audit Committee of the Board, which believes the related party transaction was negotiated as an arms-length transaction. The proceeds from this Promissory Note and Amendment will be used to fund future acquisitions and the ongoing operations of the business, in conjunction with revenue growth in the Brands segment. The full balance is due April 2015.

Finally the Company has taken steps to reduce operating costs, primarily payroll through a reduction in headcount that had previously been focused on its Content and Platform Services business, which will result in a decline in annual salary expense of approximately $1.2 million. The Company will continue to evaluate other opportunities to control costs.

The Company intends to fund its future operations through a combination of revenue growth in its Brands segment, particularly its personal finance properties. Additionally, the Company is actively engaged in evaluating future acquisitions to provide revenue growth and the sale of certain non-core assets to provide capital.

After receipt of funding of the Promissory Note, offset by the acquisition of Pop Factory, the balance of cash and cash equivalents would be approximately $2.4 million had these occurred as of December 31, 2012. The Company has incurred net losses and generated substantial negative cash flow from operations in 2012 and in each fiscal year since its inception and has an accumulated deficit of $105.8 million as of December 31, 2012. The Company had minimal revenues in 2012 due to the termination of certain agreements in the Content and Platform Services segment at the end of 2011 and its transition to owning and operating its own digital media properties. Since that time, the Company has been focused on building and acquiring wholly owned digital media properties for its Brands segment.


We consistently monitor our cash position, and make operational changes as necessary to maintain our business objective of funding ongoing operations and related growth. The decrease in cash is primarily due to the use of cash to fund our operating and investing activities, including website development costs and the acquisition of Banks.com, offset by the proceeds provided through the equity funding completed in February 2012 and debt funding completed in November 2012.

Absent any acquisitions of new businesses or the material increase in expectations from its existing customers, current revenue growth may not be sufficient to sustain the Company's operations in the long term. As such, the Company may need to obtain additional equity financing and/or divest of certain assets or businesses, neither of which can be assured on commercially reasonable . . .

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