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MARK > SEC Filings for MARK > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for REMARK MEDIA, INC.

Form 10-Q for REMARK MEDIA, INC.


14-Nov-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 and Pop Factory mergers 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/A 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.

Mission

Our mission is to provide unique and dynamic digital media experiences across multiple verticals, with a focus on compelling content, trusted brands, and valuable resources for consumers.

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, social media and e-commerce 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. Revenue in these international subsidiaries has not yielded any significant revenues in 2012 or to date in 2013.

Remark Media is also a founding partner and developer of the U.S.-based business 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 with headquarters in Las Vegas and operations in Atlanta, 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 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


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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 $2,375,000. 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 of the volume weighted average prices of the Company's common stock for the ten trading days prior to the entrance into the agreement and an approximately 16% premium to the closing price of the Company's common stock on the day of entrance into the agreement. $4.0 million of the proceeds were received as of September 30, 2013, and the balance is due April 2015.

On November 12, 2013, Digipac, LLC notified the Company that it wished to convert the entire principal amounts of both the November 2012 Note and the April 2013 Note, and all accrued and unpaid interest thereon, into shares of the Company's common stock, effective as of the same day. This conversion resulted in the issuance of 3,556,672 shares of the Company's common stock to Digipac, LLC, and the extinguishing of a total of $5.8 million in debt issued by the Company and the approximately $281,236 in accrued and unpaid interest.

Our Strategy

This year, we are focusing on creating an 18-to-34 year old, young adult lifestyle digital media vertical, and commenced the development in March 2013 with the acquisition of Pop Factory, the owner and operator of Bikini.com. We have redeveloped the website and will add retail e-commerce from swimwear and accessories in November 2013. Additionally, we intend to continue to acquire other complimentary digital media properties.

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, US Tax Center at IRS.com, FileLater.com, and MyStockFund.com.

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. Bikini.com relaunched earlier this year and will introduce retail e-commerce for swimwear and accessories in November 2013.

In 2013, we acquired Bikini.com, and relaunched the brand and website as a beach lifestyle destination with a focus on fashion, style, fitness, travel and fun for 18-to-34 year old women. In November 2013, we will add retail e-commerce to Bikini.com, allowing end users to purchase swimwear and accessories. Further, we additionally continue to focus on our personal finance and 18-to-34 year old demographic based properties.

Although Remark Media is no longer providing services for Sharecare, the Company maintains equity ownership in the venture. As of September 30, 2013, we own approximately 8.65% 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


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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.

International

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 are focused on leveraging the traffic that our BoWenWang and ComoTudoFunciona websites receive in China and Brazil, respectively. We believe there are significant opportunities in the gaming, travel, and other consumer verticals that our content platforms provide us broad access to develop.

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 and nine months ended September 30, 2013 and 2012. We do not expect to see meaningful growth in our China operations in the near term without an increased investment, which we do not contemplate.

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 minimal revenues from Brazil during the three months and nine months ended September 30, 2013 and 2012, respectively. We do not expect to see meaningful growth in our Brazil operations in the near term without an increased investment, which we do not contemplate.

Further, we have established media distribution relationships in Asia with a focus on China. We are the official digital distributor in China, Taiwan, Hong Kong, Macao, and South Korea of the live internet broadcast of the Clash in Cotai / Pacquiao vs. Rios boxing event, promoted by Las Vegas Sands and Top Rank, occurring in Macau, China on November 23rd. We are providing digital and social media, marketing, streaming operations, and establishing brand partners and sponsors for the event. We are in the process of developing additional rich media opportunities to deliver original sports and entertainment content to the evolving Chinese media market through our strategic relationships in Asia and, more specifically, in China.


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Results of Operations

The following table sets forth our operations for the three and nine months ended September 30, 2013 and 2012:

                  Three Months Ended September 30,       Nine Months Ended September 30,
                        2013                2012               2013               2012


Operating
revenue
Brands          $         133,703     $     263,119    $      1,066,312     $     320,233
Total revenue

Operating
expenses
Sales and
marketing                  38,281           108,382             225,700           215,542
Content,
technology and
development                92,065           608,244             437,715         1,307,259
General and
administrative            903,628         1,328,844           3,663,586         3,583,020
Depreciation
and
amortization
expense                   121,282           149,689             350,531           202,213
Total operating
expenses                1,155,256         2,195,159           4,677,532         5,308,034

Operating loss         (1,021,553)       (1,932,040)         (3,611,220)       (4,987,801)
Other income
(expense)
  Gain (loss)
on change in
fair value of
derivative
liability                (161,911)          269,852            (363,030)          964,380
  Interest
expense                  (110,363)          (11,505)           (267,908)          (38,630)
  Other expense              (141)          (14,876)               (146)           (7,769)
Total other
income
(expense)                (272,415)          243,471            (631,084)          917,981

Loss before
gain (loss)
from
equity-method
investments            (1,293,968)       (1,688,569)         (4,242,304)       (4,069,820)

Change of
interest gain
of
equity-method
investment                       -                 -                   -        2,494,990
Proportional
share in loss
of
equity-method
investment                       -         (739,704)           (222,707)       (2,553,086)

Net loss from
equity-method
investment                       -         (739,704)           (222,707)          (58,096)

Loss before
income taxes           (1,293,968)       (2,428,273)         (4,465,011)       (4,127,916)

Income tax
(benefit)
expense                          -                 -                   -                 -

Net loss        $      (1,293,968)    $  (2,428,273)   $     (4,465,011)    $  (4,127,916)

Net loss per
share
Net loss per
share, basic
and diluted     $           (0.18)    $       (0.38)   $          (0.62)    $       (0.68)

Basic and
diluted
weighted
average shares
outstanding             7,224,810         6,414,200           7,224,810         6,089,553

Comprehensive
loss
Net loss        $      (1,293,968)    $  (2,428,273)   $     (4,465,011)    $  (4,127,916)
Cumulative
translation
adjustments                (1,891)            1,179              (8,286)           (3,182)

Total
comprehensive
loss            $      (1,295,859)    $  (2,427,094)   $     (4,473,297)    $  (4,131,098)


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Revenue

Total revenue for the three months ended September 30, 2013 was approximately $0.1 million, a decrease of approximately $0.1 million from the same period in 2012. For the nine months ended September 30, 2013 and 2012, revenue was $1.1 million, an increase of approximately $0.8 million from the same period in 2012. The increase from the prior year's period relates primarily to the revenues from Banks.com and Pop Factory. Only minimal revenues were generated from international operations.

Sales and Marketing

Sales and marketing expenses were $0.1 million and $0.1 million in the three months ended September 30, 2013 and 2012, respectively, and $0.2 million and $0.2 million in the nine months ended September 30, 2013 and 2012, respectively. The marketing efforts to drive traffic to the sites have remained constant from period-to-period because of cost monitoring measures.

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 September 30, 2013 and 2012, the expense was $0.1 and $0.6 million, respectively. For the nine months ended September 30, 2013 and 2012, the expense was $0.4 million and $1.3 million, respectively. The decrease is due to a reduction in expense realized from reimbursements from the Company's agreement with The Street - this agreement was terminated on May 31, 2013.

General and Administrative Expenses

Our total general and administrative expenses were approximately $0.9 million and $1.3 million in the three months ended September 30, 2013 and 2012, respectively, and $3.6 million and $3.5 million in the nine months ended September 30, 2013 and 2012, respectively. The increase primarily relates to legal fees associated with potential acquisitions and stock-based compensation issued to both employees, directors, and consultants in 2013. The increase was offset by the significant reduction in headcount as a result of the Company's restructuring efforts at the end of 2012.

Depreciation and Amortization

Depreciation and amortization expense was $0.1 million and $0.1 million for the three months ended September 30, 2013 and 2012, respectively, and $0.4 million and $0.2 million for the nine months ended September 30, 2013 and 2012. The increase is primarily due to amortization of the software capitalized in 2012 and amortization of intangible assets from the Banks.com and Pop Factory acquisitions.

Interest Expense

Interest expense for the three months ended September 30, 2013 and 2012 was $0.1 million and $11 thousand, respectively, and $0.3 million and $39 thousand for the nine months ended September 30, 2013 and 2012, respectively. The increase in interest expense is due to the additional debt funding on both November 23, 2012 and April 2, 2013.

Change in Fair Value of Derivative Liability

The change in fair value of the derivative liability for the three months ended September 30, 2013 and 2012 was a loss of $0.2 million and a gain of $0.3 million, respectively. The decrease relates to the increased probability of an anti-dilutive event occurring subsequent to quarter end.

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 nine months ended September 30, 2012, we recorded a gain of $2.5 million as a result of the change in interest ownership in Sharecare. Additionally, we recorded a loss of $0.7 million and $2.6 million for the three and nine months ended September 30, 2012, representing the Company's share in Sharecare's income. 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.


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Recent Accounting Pronouncements

In January 2013, the Financial Accounting Standards Board ("FASB") amended its guidance on the presentation of comprehensive income. Under the amended guidance, an entity must present information regarding reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements. This is required for both annual and interim reporting. The amendment becomes effective for reporting periods beginning after December 15, 2012 and is applied prospectively. Early adoption is permitted. The Company's adoption of the standard did not have an impact on the Company's condensed consolidated balance sheet, statement of operations or cash flows as it was disclosure-only in nature.

Significant Accounting Policies

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to accounts receivable, intangible assets, useful lives of property and equipment, stock-based compensation, equity-method investments, and income taxes, among other things.

Revenue Recognition

The Company generally recognizes revenue when a persuasive evidence of an arrangement exists; services have been provided; fees are fixed or determinable; and collectability is reasonably assured.

The Company generally recognizes revenue from its network of digital media businesses, which includes properties focused on Young Adult Lifestyle:
Bikini.com; Personal Finance: DimeSpring.com, Banks.com, US Tax Center at IRS.com, FileLater, and MyStockFund; and International: BoWenWang and ComoTudoFunciona. Revenue is recognized as visitors are exposed to or react to advertisements on its websites, or purchase goods or services. Revenue from advertising is generated in the form of sponsored links and display ads. This includes both pay-per-performance ads and paid-for-impression advertising. In the pay-per-performance model, revenue is generally earned based on the number of clicks or other actions taken associated with such ads; in the paid-for-impression model, revenue is derived from the display of ads.

The Company generally recognizes services revenue during the period services related to the design, development, hosting, and related web services are performed. Revenue is recorded on a gross versus net basis when Remark Media bears the risk of loss related to the services performed, the majority of which relates to services performed by the Company's resources. The Company may also recognize content and platform services revenue on certain projects using a percentage of completion method. Sales are calculated based on the total costs incurred to date divided by total estimated costs at completion times the contract price.

Operating Expenses

In light of the change in RemarkMedia's business strategy, the Company revised the presentation of operating expenses in its condensed consolidated statements of operations and completed the reclassification of the condensed consolidated statements of operations for the prior year periods presented. Beginning with the second quarter 2012, the Company's operating expenses reflect sales and marketing; content, technology and development; general and administrative; and depreciation and amortization. Sales and marketing expenses include all selling and marketing expenses such as promotions, public relations and compensation of our sales and marketing departments. Content, technology and development expenses include costs of translating and localizing content and acquiring original content written by third-parties as well as costs associated with the design, development, hosting of websites in addition to user acquisition and user retentions and compensation of our technology, content, product and web design departments which does not qualify to be capitalized. General and administrative expenses include all legal, finance, accounting and administrative expenses such as professional fees and facilities costs. Depreciation and amortization include the depreciation of our acquired fixed assets and amortization of software and definite-lived intangible assets. All periods presented have been reclassified to conform to the new presentation.

Purchase Price Allocations

Occasionally, the Company enters into business combinations. The purchase price is allocated to the various assets acquired and liabilities assumed based on their estimated fair value. Fair values of assets acquired and liabilities assumed are based upon available information and may involve engaging an independent third party to perform an appraisal of tangible and intangible assets. Estimating fair values can be complex and subject to significant business judgment and most commonly impacts property, equipment, software, and definite- or indefinite-lived intangible assets.


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Software Development Costs

The Company capitalizes qualifying costs of computer software and website development costs. Costs incurred during the application development stage as well as upgrades and enhancements that result in additional functionality are capitalized. The internally developed software costs capitalized were $0.5 million and $0.5 million, at September 30, 2013 and December 31, 2012, respectively and are included in "Property, equipment and software" in the condensed consolidated balance sheet. Internally developed software and website development costs are being amortized utilizing the straight-line method over a period of three years, the expected period of the benefit. For the three and nine months ended September 30, 2013, there was approximately $0.1 million and $0.2 million of amortization recorded for these costs, respectively.

Stock-Based Compensation

The Company measures stock-based compensation at the grant date based on the calculated fair value of the award. The Company recognizes the expense over the recipient's requisite service period, generally the vesting period of the award. The Company estimates the fair value of stock options at the grant date using the Black-Scholes option pricing model with weighted average assumptions . . .

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