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MARK > SEC Filings for MARK > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for REMARK MEDIA, INC.

Form 10-K for REMARK MEDIA, INC.


31-Mar-2014

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 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 and Pop Factory acquisitions 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, 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.

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 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 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 and The Street elected to terminate the agreement effective May 31, 2013.

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 ("Pop Factory"), the owner and operator of Bikini.com, a beach lifestyle digital media 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.

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.

On November 13, 2013, the Company entered into a $2.5 million Term Loan Agreement, at 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 Term Loan Agreement is secured pursuant to the Term Loan Agreement detailed above, as amended by Amendment No. 2 to that Term Loan Agreement, dated April 2, 2013. The principal and accrued interest under the Term Loan Agreement is convertible into Common Stock of the Company at the rate of $3.75 per share, which was the closing price of the Company's common stock on the date of entrance into the agreement. The balance is due November 2015.

On January 29, 2014, the Company entered into a $3.5 million Term Loan Agreement ("January 2014 Note"), at 6.67% annual interest for the first year and 8.67% for the second year, with the lender controlled by and in part owned by Mr. Kai-Shing Tao, the Company's Chairman and Chief Executive Officer, and in part owned by Mr. Douglas Osrow, the Company's Chief Financial Officer. The principal and accrued interest under the Term Loan Agreement is convertible into Common Stock of the Company at a rate of $5.03 (the "Conversion Price") - which was the stock price immediately prior to the effective date of the agreement - if all or a portion of is elected by Digipac. The Company may also convert the all or a portion of the principal and accrued interest of the January 2014 Note into Common Stock at the conversion price if the weighted average price of Common Stock is equal to at least the 150% of the conversion price for at least 30 to 40 trading days immediately prior to the date of the Company's election. The January 2014 Note provides that the Company and Digipac will negotiate and enter into a registration rights agreement providing Digipac with demand and piggyback rights with respect to the shares of Common Stock underlying the January 2014 Note.

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 added retail e-commerce for swimwear and accessories in November 2013. On January 15, 2014, the Company's wholly owned subsidiary, Banks.com, completed an asset acquisition of domain names www.taxextension.com, www.taxextensions.com, and www.onlinetaxextension.com - which provide web-based tax extension services. 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 by acquiring Banks.com, Inc., which brought us the portfolio of personal finance properties including Banks.com, US Tax Center at www.irs.com, FileLater.com, and MyStockFund.com.

Our Operations

Domestic

The Banks.com acquisition was successfully completed on June 28, 2012. Assets obtained through the Banks.com acquisition serve to build a network of personal finance digital media businesses. These include Banks.com, the US Tax Center at www.irs.com, FileLater.com, and MyStockFund.com.

In 2013, we acquired Pop Factory, 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 added retail e-commerce to Bikini.com, allowing end users to purchase swimwear and accessories.

We continue to invest in technology and product development to support these businesses.

Although Remark Media is no longer providing services for Sharecare, the Company maintains equity ownership in the venture. As of December 31, 2013, we own approximately 8.19% 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 the 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 years ended December 31, 2013 and 2012. We do not expect to see meaningful growth in our China operations in the near term without an increased investment.

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 years ended December 31, 2013 and 2012, respectively. We do not expect to see meaningful growth in our Brazil operations in the near term without an increased investment.

Further, we have established media distribution relationships in Asia with a focus on China. We were appointed 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 23, 2013. We provided digital and social media, marketing, streaming operations, and establishing brand partners and sponsors for the event. Related to this event, we are the exclusive content partner for China's first streaming video boxing channel, which we operate in conjunction with PPTV, a leading Chinese streaming video platform. 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.


Results of Operations - Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

The following table sets forth our consolidated results of operations for the years ended December 31, 2013 and 2012.

                                                   Twelve Months Ended December 31,
                                                        2013                2012


Operating revenue
Brands                                           $       2,048,304     $     500,890
     Total revenue                                       2,048,304           500,890

Operating expenses
Sales and marketing                                        388,361            91,467
Content, technology and development                        566,883            75,720
General and administrative                               6,312,880         6,150,269
Impairment loss                                                   -          412,979
Depreciation and amortization expense                      666,395           232,574
     Total operating expenses                            7,934,519         6,963,009

Operating loss                                          (5,886,615)       (6,462,119)

Other income (expense)
 Gain on change in fair value of
derivative liability                                      (491,638)          930,132
  Interest expense                                        (364,332)          (64,838)
  Other income (expense)                                       (66)           12,970
     Total other income (expense)                         (856,036)          878,264

Loss before gain (loss) from equity-method
investments                                             (6,742,651)       (5,583,855)

Change of interest gain of equity-method
investments                                                       -        2,494,990
Proportional share in loss of equity-method
investment                                                (222,707)       (2,948,206)
                                                          (222,707)         (453,216)

Net loss before benefit from income taxes               (6,965,358)       (6,037,071)

Income tax (expense) benefit                                      -           (1,531)

Net loss                                         $      (6,965,358)    $  (6,038,602)

Net loss per share
Net loss per share, basic and diluted            $           (0.90)    $       (0.91)

Basic and diluted weighted average shares
outstanding                                      $       7,732,748         6,605,563

Comprehensive loss
Net loss                                         $      (6,965,358)    $  (6,038,602)
Cumulative translation adjustments                          (8,713)          (11,511)
Total comprehensive loss                         $      (6,974,071)    $  (6,050,113)


Segment Data

We monitor and analyze our financial results on a segment basis for reporting and management purposes, as presented in Note 6 to the accompanying 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 Banks.com acquisition completed on June 28, 2012 and Pop Factory acquisition completed on March 29, 2013. On January 15, 2014, we expanded our personal finance portfolio by acquiring the tax extension domains. The operating results for services performed under the Sharecare and Discovery services agreements are included in the Content and Platform Services segment. However, the Sharecare services agreement was terminated in December 2011. The 2012 activity relates to an impairment of the remaining long-lived assets within that segment.

Revenues

For the twelve months ended December 2013 and 2012, we generated revenue of $2.0 million and $0.5 million, respectively. The increase from the prior year's period relates primarily to the revenues from Banks.com and Pop Factory.

Sales and Marketing

Sales and marketing expenses were $0.4 million and $0.1 million in 2013 and 2012, respectively. The marketing efforts to drive traffic to the sites have increased slightly from year-to-year because of the increase in number of sites through Banks.com and Pop Factory acquisitions.

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 year ended December 31, 2013 and 2012, the expense was $0.6 and $0.1 million, respectively. The increase relates to our capital investment in software projects, editorial work outsourced to third parties, and software maintenance related to our websites.

General and Administrative Expenses

Our total general and administrative expenses were approximately $6.3 million and $6.2 million for the years ended December 31, 2013 and 2012, respectively. The increase principally relates to the legal expenses incurred for due diligence services..

Impairment Loss

Impairment loss was $0.4 million for the year ended December 31, 2012 - due to the Company's abandonment of certain projects in the Content and Platform Services business. No impairment loss was recognized for the year ended December 31, 2013.

Depreciation and Amortization

Depreciation and amortization expense was $0.7 million and $0.2 million for the years ended December 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 and Pop Factory acquisitions.

Gain (Loss) on Change in Fair Value of Derivative Liability

The loss on change in fair value of the derivative liability was approximately $0.5 million for the year ended December 31, 2013. The gain on change in fair value of derivative liability was approximately $0.9 million for the year ended December 31, 2012. Since the February 27, 2012 transaction date, the loss on change in fair value of derivative liability increased principally from the higher probability rate of a future financing event being dilutive.


Interest Expense

Interest expense for the year ending December 31, 2013 and 2012 was $0.4 million and $0.1 million, respectively. The increase primarily relates to interest accrued on the November 2012 Note and April 2013 Note - both of which were converted in November 2013.

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 year ended December 31, 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 $2.9 million for the year ended December 31, 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.

Liquidity and Capital Resources

As of December 31, 2013, the Company's total cash and cash equivalents balance was approximately $1.3 million. The Company has incurred net losses and generated substantial negative cash flow from operations in the twelve months ended December 31, 2013 and in each fiscal year since its inception and has an accumulated deficit of $111.7 million as of December 31, 2013. 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. The Company's revenues in 2013 were $2.0 million which was a $1.5 million increase from 2012. The increase was due to the acquisition of Pop Factory and the personal finance portfolio.

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. The full balance is due November 2014.

On April 2, 2013, the Company entered into a $4.0 million 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 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. The full 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 into the issuance of 3,556,672 shares of the Company's common stock to Digipac, LLC and the extinguishing of the total of $5.8 million in debt issued by the Company and the approximately $281,236 in accrued and unpaid interest.

On November 13, 2013, the Company entered into a $2.5 million Term Loan Agreement, at 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 Agreement is secured pursuant to the November 2012 Note and April 2013 Note, as amended by Amendment No. 2 to that Term Loan Agreement, dated April 2, 2013. The principal and interest under the Term Loan Agreement is convertible into Common Stock of the Company at a rate of $3.75 per share, which is the closing price of the Company's common stock on the date of entrance into the agreement. The balance is due on November 13, 2015.

On January 29, 2014, Remark Media, Inc. (the "Company") issued a Senior Secured Convertible Term Note in the original principal amount of $3,500,000 (the "January 2014 Note") to Digipac, LLC ("Digipac") in exchange for $3,500,000 in cash. The January 2014 Note bears interest at a rate of 6.67% per annum for the first year and 8.67% per annum thereafter, with interest payable quarterly and all unpaid principal and any accrued but unpaid interest due and payable on the second anniversary of its issuance. The Company may prepay all or a portion of the January 2014 Note at any time upon at least 15


days' prior written notice to Digipac. The Company's issuance of the January . . .

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