REMARK HOLDINGS, INC. - Quarter Report: 2013 March (Form 10-Q)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 001-33720
________________________________________
REMARK MEDIA, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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33-1135689 |
(State of Incorporation) |
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(I.R.S. Employer |
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Identification Number) |
Five Concourse Parkway, Suite 2410 Atlanta, Georgia 30328 |
(Address of principal executive offices, including zip code) |
770-821-6670 |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer o |
Non-accelerated filer o |
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Smaller reporting company x |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
At April 14, 2013, the number of common shares outstanding was 7,132,594.
The total number of pages is 25
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PART I – FINANCIAL INFORMATION |
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Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 (unaudited) |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART II – OTHER INFORMATION |
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PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
REMARK MEDIA, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Expressed in U.S. Dollars)
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March 31, 2013 |
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December 31, 2012 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
1,727,674 |
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$ |
1,355,332 |
Trade accounts receivable, net |
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240,244 |
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101,865 |
Prepaid expenses and other current assets |
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753,880 |
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503,256 |
Total current assets |
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2,721,798 |
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1,960,453 |
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Property and equipment, net |
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393,287 |
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400,526 |
Investment in unconsolidated affiliate |
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229,929 |
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452,636 |
Licenses to operate in China |
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100,000 |
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100,000 |
Intangible assets, net |
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2,371,662 |
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1,754,108 |
Goodwill |
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3,259,802 |
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1,584,976 |
Other long-term assets |
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205,876 |
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105,876 |
Total assets |
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$ |
9,282,354 |
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$ |
6,358,575 |
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Liabilities and Stockholders’ Equity |
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Current liabilities |
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Accounts payable |
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$ |
387,278 |
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$ |
516,623 |
Advances from shareholder |
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85,745 |
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85,745 |
Accrued expenses and other current liabilities |
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974,997 |
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459,548 |
Current portion of capital lease obligations |
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121,832 |
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117,549 |
Total current liabilities |
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1,569,852 |
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1,179,465 |
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Long-term liabilities |
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Deferred tax liability |
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25,000 |
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25,000 |
Other long-term liabilities |
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279,573 |
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282,791 |
Capital lease obligations, less current portion |
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262,208 |
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294,214 |
Long-term debt with related party |
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5,300,000 |
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1,800,000 |
Total liabilities |
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7,436,633 |
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3,581,470 |
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Stockholders’ equity |
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Preferred stock, $0.001 par value; 1,000,000 shares authorized, none issued |
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- |
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Common stock, $0.001 par value; 20,000,000 shares authorized, 7,132,594 and 7,113,744 issued and outstanding at March 31, 2013 and December 31, 2012, respectively |
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7,133 |
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7,114 |
Additional paid-in-capital |
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108,633,209 |
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108,507,255 |
Accumulated other comprehensive income |
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1,410 |
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5,370 |
Accumulated deficit |
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(106,796,031) |
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(105,742,634) |
Total stockholders’ equity |
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1,845,721 |
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2,777,105 |
Total liabilities and stockholders’ equity |
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$ |
9,282,354 |
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$ |
6,358,575 |
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See Notes to Condensed Consolidated Financial Statements |
1
REMARK MEDIA, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE LOSS (UNAUDITED)
(Expressed in U.S. Dollars)
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Three Months Ending March 31, |
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2013 |
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2012 |
Operating revenue |
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Brands |
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$ |
208,167 |
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$ |
24,111 |
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Operating expenses |
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Sales and marketing |
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12,356 |
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23,698 |
Content, technology and development |
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83,096 |
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327,224 |
General and administrative (including stock based compensation expense of $125,973 and $229,183 in 2013 and 2012, respectively) |
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814,854 |
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1,121,852 |
Depreciation and amortization expense |
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84,039 |
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25,467 |
Total operating expenses |
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994,345 |
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1,498,241 |
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Operating loss |
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(786,178) |
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(1,474,130) |
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Other income (expense) |
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Interest expense |
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(44,355) |
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(24,684) |
Other income (expense) |
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(157) |
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3,191 |
Total other income (expense) |
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(44,512) |
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(21,493) |
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Loss before loss from equity-method investments |
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(830,690) |
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(1,495,623) |
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Change of interest gain of equity-method investment |
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- |
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2,192,755 |
Proportional share in loss of equity-method investment |
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(222,707) |
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(918,880) |
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Loss before income taxes |
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(1,053,397) |
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(221,748) |
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Income tax expense |
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- |
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- |
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Net loss |
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$ |
(1,053,397) |
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$ |
(221,748) |
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Net loss per share |
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Net loss per share, basic and diluted |
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$ |
(0.15) |
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$ |
(0.04) |
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Basic and diluted weighted average shares outstanding |
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7,125,215 |
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5,775,289 |
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Comprehensive loss |
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Net loss |
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$ |
(1,053,397) |
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$ |
(221,748) |
Cumulative foreign currency translation adjustments |
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(3,960) |
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(5,733) |
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Total comprehensive loss |
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$ |
(1,057,357) |
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$ |
(227,481) |
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See Notes to Condensed Consolidated Financial Statements |
2
REMARK MEDIA, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOWS (UNAUDITED)
(Expressed in U.S. Dollars)
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Three Months Ending March 31, |
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2013 |
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2012 |
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Cash flows from operating activities: |
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Net cash used in operating activities |
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$ |
(737,844) |
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$ |
(943,781) |
Cash used in operating activities |
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(737,844) |
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(943,781) |
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Cash flows from investing activities: |
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Purchases of property, equipment and software |
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(10,335) |
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(256,999) |
Cash paid for acquisition, net of cash acquired |
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(2,351,755) |
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- |
Cash used in investing activities |
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(2,362,090) |
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(256,999) |
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Cash flows from financing activities: |
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Proceeds from issuance of equity securities/debt |
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3,500,000 |
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4,251,500 |
Payment of capital leases |
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(27,723) |
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- |
Stock issuance costs |
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- |
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(401,049) |
Cash provided by financing activities |
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3,472,277 |
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3,850,451 |
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Net change in cash and cash equivalents |
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372,342 |
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2,649,671 |
Impact of foreign currency translation on cash |
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- |
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(7,097) |
Cash and cash equivalents at beginning of period |
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1,355,332 |
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1,531,502 |
Cash and cash equivalents at end of period |
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$ |
1,727,674 |
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$ |
4,174,076 |
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Three Months Ending March 31, |
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2013 |
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2012 |
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Supplemental disclosure of cash flow information |
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Other non-cash financing and investing activities |
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Stock issuance costs |
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$ |
- |
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$ |
133,567 |
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See Notes to Condensed Consolidated Financial Statements |
3
REMARK MEDIA INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)
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.
Who We Are
Remark Media, Inc. (“Remark Media” or the “Company”) is a global digital media company incorporated in Delaware and headquartered in Atlanta, with operations in Las Vegas, Miami, Beijing and São Paulo. Remark Media is listed on The NASDAQ Capital Market.
Pop Factory Acquisition
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.
Banks.com Merger
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. The Company completed the acquisition on June 28, 2012 pursuant to which Remark Media issued approximately 702,267 shares of Common Stock to the shareholders of Banks.com, and paid $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 (and related unpaid interest), which matured on June 28, 2012.
Sale of Intersearch Corporate Services
On August 2, 2012 Remark Media sold Intersearch Corporate Services, Inc, a subsidiary of Banks.com, for a minimal consideration to better focus its resources on the Company’s core strategy.
Funding and Liquidity Considerations
As of March 31, 2013, the Company’s total cash and cash equivalents balance was approximately $1.7 million.
The Company has incurred net losses and generated negative cash flow from operations in the three months ended March 31, 2013 and in each fiscal year since its inception and has an accumulated deficit of $106.8 million as of March 31, 2013. The Company had minimal revenues in the first quarter of 2013 due to its transition to owning and operating its own digital media properties. The Company has been focused on building and acquiring wholly-owned digital media properties.
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 below, 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 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. The balance is due April 2015.
On November 23, 2012, the Company entered into a $1.8 million Term Loan Agreement, with net proceeds of $1.7 million, 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
4
REMARK MEDIA INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)
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.
On November 13, 2012, the Company entered into a Services Agreement with TheStreet Inc. (Nasdaq: TST) (“TheStreet”) in which Remark Media granted TheStreet an exclusive right to sell and serve advertisement and e-commerce on certain of Remark Media’s personal finance websites. TheStreet will also support the websites by providing personal finance content, various promotion and advertisements on TheStreet’s websites, and marketing support. The Company expects the agreement to provide at least $0.9 million over the initial term of the agreement.
The Company 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.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The accompanying interim condensed consolidated financial statements for the three months ended March 31, 2013 and 2012 are unaudited. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for financial information have been omitted pursuant to the rules and regulations of Article 10 of SEC Regulation S-X. In the opinion of management, these condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to state fairly the financial position, results of operations and cash flows for the periods indicated. The December 31, 2012 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required U.S. GAAP (“GAAP”). Operating results for the three months ended March 31, 2013 are not necessarily indicative of results that may be expected for any other future interim period or for the year ending December 31, 2013. You should read the unaudited condensed consolidated financial statements in conjunction with Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as with Remark Media’s consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
Principles of Consolidation
The consolidated financial statements include the accounts of Remark Media and its subsidiaries (1) HSW Brasil – Tecnologia e Informação Ltda., (2) HSW (HK) Inc. Limited, (3) Bonet (Beijing) Technology Limited Liability Company, (4) BoWenWang Technology (Beijing) Limited Liability Company, (5) Banks.com, (6) My Stock Fund, (7) My Dotted Ventures, and (8) Bikini.com.
5
REMARK MEDIA INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)
Banks.com, MyStockFund and MyDottedVentures are wholly-owned subsidiaries acquired through the Banks.com’s acquisition completed on June 28, 2012. Bikini.com is a wholly-owned subsidiary acquired through the Pop Factory acquisition completed on March 29, 2013. The equity of certain of these entities is partially or fully held by citizens of the country of incorporation to comply with local laws and regulations.
Equity investments in which the Company exercises significant influence but does not control and is not the primary beneficiary are accounted for using the equity method. In the event of a change in ownership, any gain or loss resulting from an investee share issuance is recorded in earnings. Investments in which the Company is not able to exercise significant influence over the investee are accounted for under the cost method. Controlling interest is determined by majority ownership interest and the ability to unilaterally direct or cause the direction of management and policies of an entity after considering any third-party participatory rights. All inter-company accounts and transactions between consolidated companies are eliminated in consolidation.
The Company uses qualitative analysis to determine whether or not it is the primary beneficiary of a VIE. The Company considers the rights and obligations conveyed by its implicit and explicit variable interest in each VIE and the relationship of these with the variable interests held by other parties to determine whether the variable interests will absorb a majority of a VIE’s expected losses, receive a majority of its expected residual returns, or both. If the Company determines that its variable interests will absorb a majority of the VIE’s expected losses, receive a majority of its expected residual returns, or both, it consolidates the VIE as the primary beneficiary, and if not, the Company does not consolidate.
The Company has determined that Bonet (Beijing) Technology Limited Liability Company is a variable interest entity as defined in ASC 810. Remark Media is the primary beneficiary of this entity and accordingly, the results of this entity have been consolidated along with other subsidiaries.
Significant Accounting Policies
Use of Estimates
The preparation of 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 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 DimeSpring.com, Banks.com, IRS.com, FileLater, MyStockFund, and Bikini.com. Revenue is recognized as visitors are exposed to or react to advertisements on its websites. Revenue from advertising is generated in the form of sponsored links and image 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 consolidated statements of operations and completed the reclassification of the 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
6
REMARK MEDIA INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)
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. According to the terms of the Service Agreement with TheStreet, the Company is entitled to certain expense reimbursements. The Company records the expense reimbursement as a reduction in that expense.
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.
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 March 31, 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 will be amortized utilizing the straight-line method over a period of three years, the expected period of the benefit. There was approximately $67 thousand of amortization recorded for these costs during the first quarter of 2013, and no amortization recorded during the first quarter of 2012.
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 for the activity under its stock plans. Option pricing model input assumptions such as expected term, expected volatility and risk-free interest rate among others, impact the fair value estimate. These assumptions generally require significant analysis and use of judgment and estimates to develop. Options vest based on meeting a minimum service period or performance condition. Restricted stock grants are recorded using the fair value of the granted shares based on the market value at the grant date. In addition, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop.
The Company does not recognize a deferred tax asset for unrealized tax benefits associated with the tax deductions in excess of the compensation recorded (excess tax benefit). The Company applies the “with and without” approach for utilization of tax attributes upon realization of net operating losses in the future. This method allocates stock-based compensation benefits last among other tax benefits recognized. In addition, the Company applies the “direct only” method in calculating the amount of windfalls or shortfalls.
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 consolidated financial position, results of operations or cash flows as it was disclosure-only in nature.
7
REMARK MEDIA INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)
3. INVESTMENT IN SHARECARE
As of March 31, 2013, Remark Media owns approximately 10.8% of the outstanding common stock of Sharecare. Until 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 by Sharecare on the Company.
The following table shows selected unaudited financial data of Sharecare including Remark Media’s proportional share of net loss in Sharecare as reported under the equity method for the three months ended March 31, 2012. In the first quarter of 2013, the Company recorded a $0.2 million change in its estimate of its proportional share in loss of equity-method investment related to the period from January 1, 2012 through November 30, 2012, based on information that was finalized and provided to the Company subsequent to the issuance of its December 31, 2012 financial statements.
|
Three Months Ending March 31, |
||||
|
2013 |
|
2012 |
||
Revenues |
$ |
- |
|
$ |
4,508,683 |
Gross profit |
|
- |
|
|
4,108,426 |
Loss from operations |
|
- |
|
|
(6,520,495) |
Net loss |
|
- |
|
|
(6,604,942) |
Proportional share in loss of equity-method investment |
$ |
(222,707) |
|
$ |
(918,880) |
|
|
|
|
|
|
4. ACQUISITIONS
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.
The total consideration of the transaction was $2.4 million in cash. The acquisition was accounted for under the purchase method and, accordingly, the purchase price was allocated to the assets and liabilities based on their estimated fair values on the date of the acquisition. The aggregate purchase price allocation below is preliminary and subject to change in future periods as the Company has not yet completed its review of the current assets and liabilities.
Tangible assets |
|
|
Current assets |
$ |
- |
Fixed assets |
|
5,282 |
Total tangible assets |
|
5,282 |
|
|
|
Intangible assets |
|
|
Domain names |
|
640,000 |
Other intangible assets |
|
38,715 |
Goodwill |
|
1,674,826 |
Total intangible assets |
|
2,353,541 |
|
|
|
Liabilities assumed |
|
(7,068) |
|
|
|
Total consideration |
$ |
2,351,755 |
8
REMARK MEDIA INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)
The acquisition transaction costs incurred for the period ended March 31, 2013 totaled $0.1 million and were all expensed under the general and administrative expenses in the consolidated statement of operations for the three months ended March 31, 2013. The Pop Factory’s revenue since the acquisition effective date of March 29, 2013 through the end of first quarter of 2013, were immaterial and not included in the consolidated statements of operations.
The table below reflects a summary of the unaudited pro forma results of operations for the three months ended March 31, 2013 and 2012, as if Remark Media, Banks.com and Pop Factory were combined as of January 1, 2013 and 2012, respectively. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of these entities, and are not necessarily indicative of the results that would have occurred if the business combinations had been in effect on the dates indicated, or which may result in the future.
|
|
|
|
|
|
|
|
|
Unaudited Pro Forma Results of Operations Results of Operations Three Months Ended March 31, |
||||
|
|
|
2013 |
|
|
2012 |
Revenues |
|
$ |
244,854 |
|
$ |
1,117,100 |
Operating Loss |
|
|
(804,393) |
|
|
(1,459,934) |
Net Loss |
|
$ |
(1,070,755) |
|
$ |
(321,552) |
On August 2, 2012, Remark Media sold Intersearch Corporate Services, Inc. a subsidiary of Banks.com for minimal consideration.
On June 28, 2012, Remark Media completed the merger (the “Merger”) contemplated by the Agreement and Plan of Merger dated as of February 26, 2012, among the Company, Banks.com and Remark Florida, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”), pursuant to which Merger Sub merged with and into Banks.com and Banks.com survived the Merger as a wholly-owned subsidiary of Remark Media. At the effective time of the Merger, each share of the outstanding common stock of Banks.com was converted into the right to receive 0.0258 shares of Remark Media common stock, for an aggregate of 670,815 shares of Remark Media common stock. The outstanding shares of Banks.com preferred stock, including all accrued and unpaid dividends as of the date of closing of the Merger on such preferred stock, a Note and a Warrant, all of which are held by Daniel M. O’Donnell, President and Chief Executive Officer of Banks.com, and his affiliates, were converted into cash in the aggregate amount of $300,000 and the right to receive 31,452 shares of Remark Media common stock. In connection with the Merger, Banks.com issued an Amended and Restated Promissory Note in the principal amount of $125,000 to Mr. O’Donnell and his wife, which matured on June 28, 2012. The Company settled the cash consideration of $300,000 on the date of closing and $131,250 in settlement of the promissory note in the principal amount of $125,000 and related interest.
5. CAPITAL LEASES
On December 7, 2010, Banks.com entered into a sale-leaseback arrangement with Domain Capital, LLC, (“Domain Capital”) consisting of an agreement to assign the domain name, banks.com, to Domain Capital in exchange for $0.6 million in cash and a Lease Agreement to lease back the domain name from Domain Capital for a five year term. Effective June 28, 2012, Banks.com became a wholly-owned subsidiary of Remark Media and according to the Agreement and Plan of Merger, Remark Media assumed all outstanding liabilities on the effective date of close. As of March 31, 2013, total obligations under this agreement were $0.4 million, $0.1 million of which is included under the current portion of capital lease obligations and the remainder is included under capital lease obligations, net of current portion of the Company’s consolidated balance sheets at March 31, 2013. The following table represents the approximate future minimum capital lease payments due under this agreement as of March 31, 2013:
9
REMARK MEDIA INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)
|
Capital Lease Commitments |
|
|
|
|
April through December 2013 |
$ |
128,466 |
2014 |
|
171,288 |
2015 |
|
171,288 |
Total commitments |
|
471,041 |
Interest on capital leases |
|
(87,000) |
Present value of minimum capital lease payments |
$ |
384,040 |
6. COMMITMENTS AND CONTINGENCIES
The Company has entered into operating leases for office space. The lease agreements required security deposits and included allowances, which were used against leasehold improvements. The security deposits and the allowances were recorded as an asset and a liability, respectively in the Company’s consolidated financial statements. Rental expense for operating leases, which is recognized on a straight-line basis over the lease term, was $0.07 million for the three months ended March 31, 2013.
The following table represents the approximate future minimum lease payments at March 31, 2013 due under non-cancellable operating lease agreements with terms in excess of a year:
|
Operating Lease Commitments |
|
|
|
|
April through December 2013 |
$ |
344,625 |
2014 |
|
528,596 |
2015 |
|
537,282 |
2016 |
|
212,856 |
Total commitments |
$ |
1,623,359 |
On July 23, 2012, a complaint was filed by FOLIOfn, Inc. (“FOLIOfn”), against the Company’s subsidiary MyStockFund Securities, Inc. (“MyStockFund”), alleging that MyStockFund has infringed six U.S. Patents held by FOLIOfn relating to investment methods. The complaint seeks injunctive relief, damages, pre-judgment interest, and attorneys' fees. The case was settled between the parties, and on April 23, 2013 the litigation was terminated by the court, resulting in no liability to the Company.
In addition, the Company is engaged from time to time in certain legal disputes arising in the ordinary course of business. Furthermore, the Company accrues liabilities for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company will review these accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained, and the Company's views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made.
10
REMARK MEDIA INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)
7. STOCKHOLDERS’ EQUITY AND NET LOSS PER SHARE
Net Loss per Share
The following is a reconciliation of the numerators and denominators of our basic and diluted loss per share computations:
|
|
|
Three Months Ended March 31, |
|||
|
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
Net loss |
|
$ |
(1,053,397) |
|
$ |
(221,748) |
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
7,125,215 |
|
|
5,775,289 |
|
|
|
|
|
|
|
Net loss per share, basic and diluted |
|
$ |
(0.15) |
|
$ |
(0.04) |
|
|
|
|
|
|
|
Common shares and dilutive securities: |
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
7,125,215 |
|
|
5,775,289 |
|
|
|
|
|
|
|
Dilutive securities |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
Total common shares and dilutive securities |
|
|
7,125,215 |
|
|
5,775,289 |
Stock options and warrants are not included in the diluted earnings per share calculation above as they are anti-dilutive. The number of anti-dilutive shares outstanding excluded from the calculation above was 638,569 and 1,489,003 for the three months ended March 31, 2013 and 2012, respectively.
Stock-Based Compensation
Remark Media has authorized 800,000 shares under the 2006 Equity Incentive Plan adopted April 13, 2006 (the “2006 Plan”), and an additional 525,000 shares authorized under the 2010 Equity Incentive Plan adopted June 15, 2010, and modified on December 30, 2011 (the “2010 Plan”), for grant as part of long-term incentive plans to attract, retain and motivate its eligible executives, employees, officers, directors and consultants. Options to purchase common stock under the 2006 and 2010 Plans have been granted to its officers and employees with an exercise price equal to the fair market value of the underlying shares on the date of grant.
During the quarter ended March 31, 2013, the Company reached an agreement with certain option holders to replace 442,000 out-of-the-money options with 64,601 options with an exercise price equal to the stock price on the date of the exchange.
The Company measures stock-based compensation cost at the grant date based on the fair value of the award, and recognizes it as an expense over the requisite service period. Stock-based compensation expense for the three months ended March 31, 2013 and 2012 was approximately $0.13 million and $0.23 million, respectively. As of March 31, 2013, unrecognized compensation expense relating to non-vested stock options approximated $0.4 million, and is expected to be recognized through 2013. During the three months ended March 31, 2013, Remark Media granted 25,000 options at a per share exercise price of $5.00. The grant date fair value of grant options vesting during the three months ended March 31, 2013 and 2012 was approximately $0.18 million and $0.14 million, respectively. Additionally, the Company granted 100,398 shares of restricted stock that vest throughout 2013. Through March 31, 2013, no options have been exercised under the 2006 Plan or the 2010 Plan.
At March 31, 2013, the Company had additional outstanding warrants to acquire 30,000 shares of common stock which had exercise prices ranging from $35.00 to $98.90 and which will expire through 2017.
11
REMARK MEDIA INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in U.S. Dollars)
8. RELATED PARTY TRANSACTIONS
As discussed in Note 1, the Company entered into promissory notes totaling $5.8 million with a lender controlled by and in part owned by Mr. Kai-Shing Tao, the Company’s Chairman and Chief Executive Officer.
The future maturity schedule of the long-term debt with related party was as follows as of March 31, 2013:
Year ending December 31, |
|
|
2013 |
$ |
- |
2014 |
|
1,800,000 |
2015 |
|
3,500,000 |
Proceeds of $3.5 million of the $4.0 million loan were received prior to March 31, 2013, and all amounts mature by April 2, 2015.
As of March 31, 2013, Remark Media owned approximately 10.8% of the outstanding common stock of Sharecare. Jeff Arnold, a former member of the Company’s Board of Directors, is the Chairman and Chief Executive Officer and a significant stockholder of Sharecare. Additionally, Discovery Communications, Inc., formerly the Company’s largest stockholder, is a significant stockholder of Sharecare.
9. SUBSEQUENT EVENTS
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.
12
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
13
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 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.
International
14
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.
15
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 |
Operating revenue |
|
|
|
|
|
|
Brands |
|
$ |
208,167 |
|
$ |
24,111 |
Total revenue |
|
|
208,167 |
|
|
24,111 |
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
Sales and marketing |
|
|
12,356 |
|
|
23,698 |
Content, technology and development |
|
|
83,096 |
|
|
327,224 |
General and administrative (including stock-based compensation expense of $125,973 and $229,183 in 2013 and 2012, respectively) |
|
|
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) |
Other income (expense) |
|
|
(157) |
|
|
3,191 |
Total other income (expense) |
|
|
(44,512) |
|
|
(21,493) |
|
|
|
|
|
|
|
Loss before loss from equity-method investments |
|
|
(830,690) |
|
|
(1,495,623) |
|
|
|
|
|
|
|
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 |
|
|
(1,053,397) |
|
|
(221,748) |
|
|
|
|
|
|
|
Income tax expense |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,053,397) |
|
$ |
(221,748) |
|
|
|
|
|
|
|
Net loss per share |
|
|
|
|
|
|
Net loss per share, basic and diluted |
|
$ |
(0.15) |
|
$ |
(0.04) |
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding |
|
|
7,125,215 |
|
|
5,775,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
Net loss |
|
$ |
(1,053,397) |
|
$ |
(221,748) |
Cumulative transation adjustments |
|
|
(3,960) |
|
|
(5,733) |
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(1,057,357) |
|
$ |
(227,481) |
16
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.
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.
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
17
$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.
The table below summarizes the change in our statement of cash flows for the three months ended March 31, 2013 and 2012:
|
|
|
Three Months Ended March 31, |
|||
|
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
|
Cash flows |
|
|
|
|
|
|
Used in operating activities |
|
$ |
(737,844) |
|
$ |
(943,781) |
Used in investing activities |
|
|
(2,362,090) |
|
|
(256,999) |
Provided by financing activities |
|
|
3,472,277 |
|
|
3,850,451 |
Net change in cash and cash equivalents |
|
|
372,342 |
|
|
2,649,671 |
Impact of currency translation on cash |
|
|
- |
|
|
(7,097) |
Cash and cash equivalents at beginning of year |
|
|
1,355,332 |
|
|
1,531,502 |
Cash and cash equivalents at end of period |
|
$ |
1,727,674 |
|
$ |
4,174,076 |
|
|
|
|
|
|
|
Noncash financing and investing activities |
|
|
|
|
|
133,567 |
18
Cash flows from operations
Our net cash used in operating activities during the three months ended March 31, 2013 was $0.7 million, a decrease of $0.2 million compared to the same period in the prior year due to a major decrease in revenues and operating income partially offset by a decrease in expenses as a result of our continued cost monitoring measures.
Cash flows from investing activities
During the three months ended March 31, 2013, our net cash used in investing activities was approximately $2.4 million compared to $0.3 million for the same period in 2012. The cash used in the three months ended March 31, 2013 consisted primarily of the acquisition of Pop Factory.
Cash flows from financing activities
For the three months ended March 31, 2013, the net cash provided by financing activities consists of the cash proceeds of $3.5 million provided by the Senior Secured Convertible Promissory Note.
Off Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We translate the foreign currency financial statements of our international operations into U.S. dollars at current exchange rates, except revenue and expenses, which we translate at average exchange rates during each reporting period. We accumulate net exchange gains or losses resulting from the translation of assets and liabilities in a separate caption of stockholders’ equity titled “accumulated other comprehensive income (loss)”. Generally, our foreign expenses are denominated in the same currency as the associated foreign revenue, and at this stage of our development, the exposure to rate changes is minimal.
Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and accounts receivables. At March 31, 2013, less than 1% of our cash was denominated in Brazilian Reais, Chinese Renminbi or Hong Kong Dollars, with nearly 100% of our cash denominated in US Dollars. The majority of our cash is placed with financial institutions we believe are of high credit quality. Our cash is maintained in bank deposit accounts, which, at times, exceed federally insured limits. We have not experienced any losses in such accounts and do not believe our cash is exposed to any significant credit risk.
We do not use financial instruments to hedge our foreign exchange exposure because the effects of the foreign exchange rate fluctuations are not currently significant. We do not use financial instruments for trading purposes. We do not use any derivative financial instruments to mitigate any of our currency risks.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer (“PEO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of March 31, 2013. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms and include, without limitation, controls and procedures designed to ensure that information required to be disclosed in such reports is accumulated and communicated to management, including the Company’s PEOs, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our PEO concluded that our disclosure controls and procedures were effective as of March 31, 2013.
Changes in Internal Control over Financial Reporting
19
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
On July 23, 2012, a complaint was filed by FOLIOfn, Inc. (“FOLIOfn”), against the Company’s subsidiary MyStockFund Securities, Inc. (“MyStockFund”), alleging that MyStockFund has infringed six U.S. Patents held by FOLIOfn relating to investment methods. The complaint seeks injunctive relief, damages, pre-judgment interest, and attorneys' fees. The case was settled between the parties, and on April 23, 2013, the litigation was terminated by the court.
In addition, the Company is engaged from time to time in certain legal disputes arising in the ordinary course of business.
Furthermore, the Company accrues liabilities for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company will review these accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained, and the Company's views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made.
20
For a discussion of risk factors regarding our company, see “Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 except for the risk factor noted below related to our liquidity.
We may not have sufficient liquidity to support our operations.
As of March 31, 2013, the Company’s total cash and cash equivalents balance was approximately $1.7 million. The Company has incurred net losses and generated substantial negative cash flow from operations in the three months ended March 31, 2013 and in each fiscal year since its inception and has an accumulated deficit of $106.8 million as of March 31, 2013. The Company had minimal revenues in 2012 and for the three months ended March 31, 2013, due to the termination of certain agreements 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.
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 in payments to the Company 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 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.
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 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. The balance is due April 2015.
If these two notes are not converted into Common Stock of the Company, or if the Company’s shareholders do not approve the ability to convert the April 2013 $4 million Promissory Note into Common Stock of the Company, the Company may be in a position where it is unable to repay the notes.
Finally the Company has taken steps to reduce operating costs, primarily payroll through a reduction in personnel, which will result in a decline in annual salary expense of approximately $1.2 million. The Company will continue to evaluate other opportunities to control costs.
The Company intends to fund its future operations through revenue growth, particularly its personal finance and 18-to-34 year old lifestyle 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.
Absent any acquisitions of new businesses, the addition of new customers, or the material increase in revenue 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
21
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.
Based on the Company’s current financial projections, which incorporate the Services Agreement with TheStreet, the Term Loan Agreement and the Promissory Note, 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 proceeds under TheStreet Agreement could be delayed or not meet expectations. Accordingly, the Company’s cash resources could be fully utilized prior to December 2013.
22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
23
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
31.1 |
|
Certification by the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer pursuant to Section 240.13a-14 or section 240.15d-14 of the Securities and Exchange Act of 1934, as amended |
|
|
|
32.1** |
|
Certification by the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
101.INS** |
|
XBRL Instance Document |
|
|
|
101.SCH** |
|
XBRL Taxonomy Extension Schema |
|
|
|
101.CAL** |
|
XBRL Taxonomy Extension Calculation Linkbase |
|
|
|
101.LAB** |
|
XBRL Taxonomy Extension Label Linkbase |
|
|
|
101.PRE** |
|
XBRL Taxonomy Extension Presentation Linkbase |
101.DEF** |
|
XBRL Taxonomy Extension Definition Linkbase |
_________________________
** These exhibits are furnished to the SEC as accompanying documents and are not to be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of these Sections nor shall they be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
24
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
REMARK MEDIA, INC. |
||
|
|
||
|
|
||
Date: May 15, 2013 |
By: |
/s/ Kai-Shing Tao |
|
|
|
Kai-Shing Tao |
|
|
|
Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
25