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TST > SEC Filings for TST > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for THESTREET, INC.

Form 10-Q for THESTREET, INC.


9-May-2014

Quarterly Report

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

Special Note Regarding Forward-Looking Statements - all statements contained in this quarterly report on Form 10-Q (the "Report") that are not descriptions of historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are inherently subject to risks and uncertainties, and actual results could differ materially from those reflected in the forward-looking statements due to a number of factors, which include, but are not limited to, the factors set forth under the heading "Risk Factors" and elsewhere in this Report, and in other documents we file with the Securities and Exchange Commission from time to time, including, without limitation, the Company's annual report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K"). Certain forward-looking statements may be identified by terms such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "forecasts," "potential," or "continue" or similar terms or the negative of these terms. All statements relating to our plans, strategies and objectives are deemed forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The forward-looking statements speak only as of the date of the filing of this Report; we have no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise.

The following discussion and analysis should be read in conjunction with the Company's unaudited condensed consolidated financial statements and notes thereto.

Overview

TheStreet, Inc., together with its wholly owned subsidiaries ("TheStreet", "we", "us" or the "Company"), is a leading digital media company focused on the financial and mergers and acquisitions environment. The Company's collection of digital services provides users, subscribers and advertisers with a variety of content and tools through a range of online, social media, tablet and mobile channels. Our mission is to provide investors and advisors with actionable ideas from the world of investing, finance and business, and dealmakers with sophisticated analysis of the mergers and acquisitions environment, in order to break down information barriers, level the playing field and help all individuals and organizations grow their wealth. With a robust suite of digital services, TheStreet offers the tools and insights needed to make informed decisions about earning, investing, saving and spending money. Since its inception in 1996, TheStreet believes it has distinguished itself from other digital media companies with its journalistic excellence, unbiased approach and interactive multimedia coverage of the financial markets, economy, industry trends, investment and financial planning.

We report revenue in two categories: subscription services and media. Subscription services is comprised of subscriptions, licenses and fees for access to securities investment information, stock market

commentary, rate services and transactional information pertaining to the mergers and acquisitions environment. Media is comprised of fees charged for the placement of advertising and sponsorships within TheStreet and our affiliated properties, our subscription and institutional services, and other miscellaneous revenue.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are deemed to be necessary. Significant estimates made in the accompanying condensed consolidated financial statements include, but are not limited to, the following:

useful lives of intangible assets,
useful lives of fixed assets,
the carrying value of goodwill, intangible assets and marketable securities,
allowances for doubtful accounts and deferred tax assets,
accrued expense estimates,
reserves for estimated tax liabilities,
estimates in connection with the allocation of the purchase price of The Deal, LLC and certain assets acquired from DealFlow Media, Inc. to the fair value of the assets acquired and liabilities assumed,
certain estimates and assumptions used in the calculation of the fair value of equity compensation issued to employees, and
restructuring charges.

We perform annual impairment tests of goodwill and other intangible assets with indefinite lives as of September 30 each year and between annual tests whenever circumstances arise that indicate a possible impairment might exist. In conducting our annual 2013 impairment test through our independent appraisal firm, we used the market approach for the valuation of our common stock and the income approach for our preferred shares. We also performed an income approach by using the discounted cash flow ("DCF") method to confirm the reasonableness of the results of the common stock market approach. Based on these approaches, we determined the Company's business enterprise value (common equity plus preferred equity) exceeded its book value by approximately 51%. The fair value of the Company's outstanding Preferred Shares requires significant judgments, including the estimation of the amount of time until a liquidation event occurs as well as an appropriate cash flow discount rate. Further, in assigning a fair value to the Company's Preferred Stock, the Company also considered that the preferred shareholders are entitled to receive a $55 million liquidation preference upon liquidation or dissolution of the Company or upon any change of control event. Additionally, the holders of the Preferred Shares are entitled to receive dividends and to vote as a single class together with the holders of the Common Stock on an as-converted basis and, provided certain preferred share ownership levels are maintained, are entitled to representation on the Company's board of directors and may unilaterally block issuance of certain classes of capital stock, the purchase or redemption of certain classes of capital stock, including Common Stock (with certain exceptions) and any increases in the per-share amount of dividends payable to the holders of the Common Stock. A decrease in the price of the Company's Common Stock, or changes in the estimated value of the Company's Preferred Shares, could materially affect the determination of the fair value and could result in an impairment charge to reduce the carrying value of goodwill, which could be material to the Company's financial position and results of operations.

A summary of our critical accounting policies and estimates can be found in our 2013 Form 10-K.

Contingencies

Accounting for contingencies, including those matters described in the Commitments and Contingencies section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's 2013 Form 10-K, is highly subjective and requires the use of judgments and estimates in assessing their magnitude and likely outcome. In many cases, the outcomes of such matters will be determined by third parties, including governmental or judicial bodies. The provisions made in the consolidated financial statements, as well as the related disclosures, represent management's best estimate of the then current status of such matters and their potential outcome based on a review of the facts and in consultation with outside legal counsel where deemed appropriate. The Company would record a material loss contingency in its consolidated financial statements if the loss is both probable of occurring and reasonably estimated. The Company regularly reviews contingencies and as new information becomes available may, in the future, adjust its associated liabilities.

Results of Operations



Comparison of Three Months Ended March 31, 2014 and March 31, 2013



Revenue



                                  For the Three Months Ended March 31,
                                          Percent                        Percent
                                         of Total                       of Total       Percent
                            2014          Revenue          2013          Revenue       Change
Revenue:
Subscription services   $ 11,449,867            80 %   $ 10,252,671            81 %          12 %
Media                      2,939,211            20 %      2,327,530            19 %          26 %
Total revenue           $ 14,389,078           100 %   $ 12,580,201           100 %          14 %

Subscription services. Subscription services revenue is comprised of subscriptions, licenses and fees for access to securities investment information, stock market commentary, rate services and transactional information pertaining to the mergers and acquisitions environment. Revenue is recognized ratably over the contract period.

Subscription services revenue for the three months ended March 31, 2014 increased by approximately $1.2 million, or 12%, when compared to the three months ended March 31, 2013. The increase was primarily related to a 19% increase in the weighted-average number of subscriptions, partially offset by a 6% decrease in the average revenue recognized per subscription. The increase in the weighted average number of subscriptions was due to new subscribers and lower attrition rates. The decrease in the average revenue recognized per subscription during the period was primarily the result of the mix of products sold and the introduction of several subscription products at lower prices.

Media. Media revenue is comprised of fees charged for the placement of advertising and sponsorships within TheStreet and its affiliated properties, our subscription and institutional services, and other miscellaneous revenue.

Media revenue for the three months ended March 31, 2014 increased by approximately $612 thousand, or 26%, when compared to the three months ended March 31, 2013. The increase in media revenue was primarily the result of higher demand from repeat and non-repeat advertisers, as well as increases in other miscellaneous media revenue.

Operating Expense



                                               For the Three Months Ended March 31,
                                                       Percent                          Percent
                                                      of Total                         of Total        Percent
                                       2014            Revenue           2013           Revenue         Change
Operating expense:
Cost of services                  $    7,737,965              54 %   $  6,242,746              50 %           24 %
Sales and marketing                    4,101,285              29 %      3,416,147              27 %           20 %
General and administrative             2,978,570              21 %      3,463,775              28 %          -14 %
Depreciation and amortization            735,861               5 %        943,056               7 %          -22 %
Restructuring and other charges                -               -          385,610               3 %         -100 %
Gain on disposition of assets                  -               -          (56,586 )            -0 %          100 %
Total operating expense           $   15,553,681                     $ 14,394,748                              8 %

Cost of services.Cost of services expense consists primarily of compensation, benefits, outside contributor costs related to the creation of our content, licensed data and the technology required to publish our content.

Cost of services expense increased by approximately $1.5 million, or 24%, over the periods. The increase was primarily the result of increased compensation expense due to a 12% increase in average headcount, fees paid to outside contributors, consulting fees, recruiting costs and reduced reimbursed expenses relating to a third party services agreement, the aggregate of which increased by approximately $1.7 million. These cost increases were partially offset by lower computer services and supplies costs and revenue share payments made to certain distribution partners, the aggregate of which decreased by approximately $201 thousand.

Sales and marketing.Sales and marketing expense consists primarily of compensation expense for the direct sales force, marketing services, and customer service departments, advertising and promotion expenses and credit card processing fees.

Sales and marketing expense increased by approximately $685 thousand, or 20%, over the periods. The increase was primarily the result of increased advertising and promotion related costs totaling approximately $703 thousand.

General and administrative. General and administrative expense consists primarily of compensation for general management, finance, technology, legal and administrative personnel, occupancy costs, professional fees, insurance and other office expenses.

General and administrative expense decreased by approximately $485 thousand, or 14%, over the periods. The decrease was primarily the result of reduced professional, consulting, occupancy and compensation expense, the aggregate of which decreased by approximately $523 thousand.

Depreciation and amortization. Depreciation and amortization expense decreased by approximately $207 thousand, or 22%, over the periods. The decrease was primarily the result of an overall reduced level of capital expenditures over the past few years partially offset by increased amortization expense related to the purchase of assets from DealFlow Media, Inc.

Restructuring and other charges. The Company did not incur any restructuring and other charges during the three months ended March 31, 2014. During the three months ended March 31, 2013, the Company recognized restructuring and other charges totaling approximately $386 thousand primarily related to noncash stock-based compensation costs in connection with the accelerated vesting of certain restricted stock units for a terminated employee.

Net Interest Income

For the Three Months Ended
March 31, Percent
2014 2013 Change
Net interest income $ 38,478 $ 71,863 -46 %

The decrease in net interest income was the result of reduced marketable securities balances, lower interest rates and interest expense related to the net present value calculation of certain restructuring costs that were recorded during 2012.

Net Loss

Net loss for the three months ended March 31, 2014 totaled approximately $1.1 million, or $0.04 per basic and diluted share, compared to net loss totaling approximately $1.7 million, or $0.05 per basic and diluted share, for the three months ended March 31, 2013.

Liquidity and Capital Resources

Our current assets at March 31, 2014 consisted primarily of cash and cash equivalents, marketable securities, and accounts receivable. We do not hold inventory. Our current liabilities at March 31, 2014 consisted primarily of deferred revenue, accrued expenses and accounts payable. At March 31, 2014, our current assets were approximately $63.6 million, 2.0 times greater than our current liabilities. With respect to many of our annual newsletter subscription products, we offer the ability to receive a refund during the first 30 days but none thereafter. We do not as a general matter offer refunds for advertising that has run.

We generally have invested in money market funds and other short-term, investment grade instruments that are highly liquid and of high quality, with the intent that such funds are available for sale for acquisition and operating purposes. As of March 31, 2014, our cash, cash equivalents, marketable securities and restricted cash amounted to approximately $60.9 million, representing 56% of total assets. Our cash, cash equivalents and restricted cash primarily consist of money market funds and checking accounts. Our marketable securities consist of investment grade corporate bonds and floating rate notes, with a maximum maturity of three years, and two municipal auction rate securities issued by the District of Columbia with a par value of approximately $1.9 million and a fair value of approximately $1.5 million that mature in the year 2038. Our total cash-related position is as follows:

                                                         March 31,        December 31,
                                                            2014              2013
Cash and cash equivalents                               $ 49,958,339      $  45,443,759
Current and noncurrent marketable securities               9,684,460         13,097,735
Restricted cash                                            1,301,000          1,301,000
Total cash and cash equivalents, current and
noncurrent marketable securities and restricted cash    $ 60,943,799      $  59,842,494

Financial instruments that subject us to concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. We maintain all of our cash, cash equivalents and restricted cash in four domestic financial institutions, and we perform periodic evaluations of the relative credit standing of these institutions.

Net cash provided by operating activities for the three-month period ended March 31, 2014 totaled approximately $2.4 million, as compared to net cash used in operating activities totaling approximately $41 thousand for the three-month period ended March 31, 2013. The improvement in net cash used in operating activities was primarily related to a decrease in the net loss from operations combined with changes in the balances of accounts payable and accrued expenses over the periods and an increase in deferred revenue resulting from improved subscription sales. These improvements were partially offset by an increase in other receivables and reduced noncash expenses.

Net cash provided by investing activities of approximately $3.0 million for the three-month period ended March 31, 2014 was primarily the result of approximately $3.3 million of maturities of marketable securities, partially offset by approximately $341 thousand of capital expenditures.

Net cash used in financing activities of approximately $872 thousand for the three-month period ended March 31, 2014 resulted from dividend payments totaling approximately $956 thousand and the purchase of treasury stock by retaining shares issuable upon the vesting of restricted stock units in connection with minimum tax withholding requirements totaling $34 thousand, partially offset by cash received from the exercise of stock options totaling approximately $119 thousand.

We have a total of approximately $1.3 million of cash that serves as collateral for outstanding letters of credit, and which cash is therefore restricted. The letters of credit serve as security deposits for office space in New York City.

We believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months. We are committed to cash expenditures in an aggregate amount of approximately $4.6 million through March 31, 2015, primarily related to operating leases and minimum payments due under an employment agreement.

As of December 31, 2013, we had approximately $156 million of federal and state net operating loss carryforwards, which results in deferred tax assets of approximately $64 million. Based on operating results for the three months ended March 31, 2014 and nine month projections, management expects to generate a tax loss in 2014 and no tax benefit has been recorded. We maintain a full valuation allowance against our deferred tax assets as management concluded that it is more likely than not that we will not realize the benefit of our deferred tax assets by generating sufficient taxable income in future years. We expect to continue to provide a full valuation allowance until, or unless, we can sustain a level of profitability that demonstrates our ability to utilize these assets.

In accordance with Section 382 of the Internal Revenue Code, the ability to utilize the Company's net operating loss carryforwards could be limited in the event of a change in ownership and as such a portion of the existing net operating loss carryforwards may be subject to limitation.

Treasury Stock

Pursuant to the terms of the Company's 1998 Stock Incentive Plan and our 2007 Performance Incentive Plan, and certain procedures adopted by the Compensation Committee of our Board of Directors, in connection with the exercise of stock options by certain of our employees, and the issuance of shares of Common Stock in settlement of vested restricted stock units, we may withhold shares in lieu of payment of the exercise price and/or the minimum amount of applicable withholding taxes then due. Through March 31, 2014, we have withheld an aggregate of 1,361,204 shares which have been recorded as treasury stock. In addition, we received an aggregate of 208,270 shares as partial settlement of the working capital and debt adjustment from the acquisition of Corsis Technology Group II LLC and 3,338 shares as partial settlement of a working capital adjustment related to our acquisition of Kikucall, Inc. These shares have been recorded as treasury stock.

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