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MARK > SEC Filings for MARK > Form 10-Q/A on 26-Sep-2013All Recent SEC Filings

Show all filings for REMARK MEDIA, INC.

Form 10-Q/A for REMARK MEDIA, INC.


26-Sep-2013

Quarterly Report


Item 2. 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-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, 2012. 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'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 Las Vegas, Miami, 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.

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.

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


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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 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 $2,351,755, net of cash acquired. 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 32% premium to the average of the volume weighted average prices of the Company's common stock for the thirty trading days prior to the entrance into the agreement. $3.5 million of the proceeds were received prior to March 31, 2013, and the remaining $0.5 million was received April 3, 2013. The 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

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.

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.

Although Remark Media is no longer providing services for Sharecare, the Company maintains equity ownership in the venture. As of March 31, 2013, 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 changed to the cost method of accounting due to a lower percentage of ownership, nonparticipation in policy-making processes, and limited existence of technology dependency.


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International

We have 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 $6 thousand and $20 thousand of revenue from Brazil during the three months ended March 31, 2013 and 2012, respectively. 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 minimal during the three months ended March 31, 2013 and 2012. We do not expect to see major growth in our China operations in the near term unless we increase investment in the brand.


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Results of Operations

The following table sets forth our operations for the three months ended March 31, 2013 and 2012:

                                                     Three Months Ending March 31,
                                                        2013                2012
                                                     (Restated -        (Restated -
                                                      Note 11)            Note 11)

Operating revenue
Brands                                              $     208,167      $      24,111
Content and platform services from affiliates                    -                  -
Total revenue                                             208,167             24,111

Cost of services                                                 -                  -

Gross margin                                              208,167             24,111

Operating expenses
Sales and marketing                                        12,356             23,698
Content, technology and development                        83,096            327,224
General and administrative                                814,854          1,121,852
Depreciation and amortization expense                      84,039             25,467
Total operating expenses                                  994,345          1,498,241

Operating loss                                           (786,178)        (1,474,130)

Other income (expense)
Interest expense                                          (44,355)           (24,684)
 Gain on change in fair value of derivative
liability                                                  17,242            115,735
Other income (expense)                                       (157)             3,191
Total other income (expense)                              (27,270)            94,242

Loss before loss from equity-method investments          (813,448)        (1,379,888)

Change of interest gain of equity-method
investment                                                       -         2,192,755
Proportional share in loss of equity-method
investment                                               (222,707)          (918,880)

Loss before income taxes                               (1,036,155)          (106,013)

Net loss                                            $  (1,036,155)     $    (106,013)

Net loss per share
Net loss per share, basic and diluted               $       (0.15)     $       (0.02)

Basic and diluted weighted average shares
outstanding                                             7,125,215          5,775,289

Comprehensive loss


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Revenue

Total revenue for the three months ended March 31, 2013 was approximately $208 thousand, an increase of approximately $184 thousand from the same period in 2012, primarily due to revenues from Banks.com.

Sales and Marketing

Sales and marketing expenses were $12 thousand and $24 thousand in the three months ended March 31, 2013 and 2012, respectively.

Content, technology and development

Content, technology and development expenses include the ongoing third-party costs to acquire original content, translate and localize content from English to Portuguese and Chinese, as well as costs of designing and developing our products, including labor, content and third party platform support services. For the three months ended March 31, 2013, the expense was $0.1 million, and $0.3 million for the three months ended March 31, 2012, primarily due to a reduction in expense realized from reimbursements from the Company's agreement with TheStreet.

General and Administrative Expenses

Our total general and administrative expenses were approximately $0.8 million and $1.1 million in the three months ended March 31, 2013 and 2012, respectively. The decrease is primarily due to the our focus to reduce costs, including personnel costs.

Depreciation and Amortization

Depreciation and amortization expense was $84 thousand and $25 thousand for the three months ended March 31, 2013 and 2012, respectively. The increase is primarily due to amortization of the software capitalized in 2012 and amortization of intangible assets from the Banks.com acquisition.

Gain in Change of Fair Value of Derivative Liability

The gain in change of fair value of the derivative liability was approximately $0.02 million and $0.1 million for the three months ended March 31, 2013 and 2012, respectively. The decrease is primarily due to the decrease in the expected remaining life and the closing stock price.

Interest Expense

Interest expense for the three months ended March 31, 2013 and 2012 was $45 thousand and $21 thousand, respectively. The increase in interest expense is due to the additional debt funding on November 23, 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 2012, the Company changed to the cost method of accounting. Under the equity method, for the three months ended March 31, 2012, we recorded a gain of $2.2 million as a result of the change in interest ownership in Sharecare. Additionally, we recorded a loss of $0.9 million which represented the Company's share in Sharecare's loss in the first quarter of 2012. In the first quarter of 2013, the Company recorded a $0.2 million change in the estimate of its proportional share in loss of equity-method investment related to the period from January 1, 2012 through November 30, 2012.

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

Our cash balance was approximately $1.7 million as of March 31 2013 compared to $1.4 million at December 31, 2012. The increase in cash is primarily due to the proceeds provided through the funding completed in November 2012 offset by use of cash to fund our operating activities.


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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 32% premium to the average of the volume weighted average prices of the Company's common stock for the thirty trading days prior to the entrance into the agreement. $3.5 million of the proceeds were received prior to March 31, 2013, and the remaining $0.5 million was received April 3, 2013. The balance is due April 2015.

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 Co-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. The balance is due November 2014.

The Company intends to fund its future operations through revenue growth, 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. The Company has also taken steps to reduce operating costs, primarily payroll through a reduction in headcount, and will continue to evaluate other opportunities to control costs.

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 terms, if at all. In addition, any equity financing that might be obtained would substantially dilute existing stockholders. There is no certainty that the Company will be successful at raising capital, nor is there certainty around the amount of funds that may be raised. In addition, the success of the Company will be subject to performance of the markets and investor sentiment regarding the macro and micro economic conditions under which we operate including stock market volatility. There can be no assurance that the Company will be successful at generating more revenues or selling any of its assets. Any failure by the Company to successfully implement these plans would have a material adverse effect on the Company's business, including the possible inability to continue operations.

If the November 2012 $1.8 million and April 2013 $4 million convertible note financings are not converted into common stock of the Company, or if the Company's shareholders do not approve the ability of the April 2013 $4 million convertible note to convert into common stock of the Company, the Company may be unable to repay such notes when either they or their interest payments become due in November 2014 and April 2015, respectively.

Based on the Company's current financial projections, which incorporates the Services Agreement with TheStreet, the new Term Loan Agreements, the acquisition and integration of Pop Factory, and the reduction in expenses, all discussed above, the Company believes it has sufficient existing cash resources to fund operations through December 2013. However, projecting operating results is inherently uncertain. Anticipated expenses can exceed those that are projected, and revenue under TheStreet Agreement could be delayed or not meet expectations. Accordingly, the Company's cash resources could be fully utilized prior to December 2013.


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The table below summarizes the change in our statement of cash flows for the three months ended March 31, 2013 and 2012:

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