Remark Media
Remark Media, Inc. (Form: 10-Q, Received: 11/26/2012 17:14:34)

 

U NITED STATES  

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 E nded September 30, 2012  

 

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

 

33-1135689

(State of Incorporation)

 

(I.R.S. Employer

 

 

Identification Number)

 

 

Six Concourse Parkway, Suite 1500  

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

 

Accelerated filer o

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

   

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 November   26 , 2012 , the number of common shares outstanding wa s   7,117,744 .  

 

  

 

 

The total number of pages is 3 2

  

 


 

 

 

 

TABLE O F CONTENTS  

 

 

 

 

 

 

Page

 PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1.  

Condensed Consolidated Financial Statements (unaudited)

 

 

Condensed Consol idated Balance Sheets as of September 30, 2012 and December 31, 2011 (unaudited)

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months and Nine Months Ended September 30, 2012 and 2011 (unaudited)

2

 

Condensed Consolidated Stat ements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited)

3

 

Notes to Condensed Consolidated Financial Statements (unaudited)

4

 

 

 

Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

1 7

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

2 3

 

 

 

Item 4.  

Controls and Procedures

2 3

 

 

 

   

PART II – OTHER INFORMATION

 

 

 

 

Item 1.  

Legal Proceedings

2 3

 

 

 

Item 1A.  

Risk Factors

2 4

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 3.  

Defaults Upon Senior Securities

30

 

 

 

Item 4.  

Mine Safety Disclosures

30

 

 

 

Item 5.  

Other Information

30

 

 

 

Item 6.  

Exhibits

3 1

 

 

 

Signature  

 

3 2

 

 

 

 

  

 

 

 

 


 

 

Table of Contents  

 

PART I – FINANCIAL INFORMATIO N  

 

Item 1. Condensed Consolidated Financial Statements  

 

REMARK MEDIA , INC. and SUBSIDIARIES  

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

2012

 

 

2011

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

$

692,675 

 

$

1,531,502 

Trade accounts receivable, net

 

156,020 

 

 

21,730 

Trade accounts receivable due from affiliates

 

 -

 

 

302,129 

Prepaid expenses and other current assets

 

165,528 

 

 

393,989 

Total current assets

 

1,014,223 

 

 

2,249,350 

Property and equipment, net

 

858,312 

 

 

364,386 

Investment in unconsolidated affiliate

 

847,756 

 

 

905,852 

License to operate in China

 

100,000 

 

 

100,000 

Intangibles assets, net

 

1,756,233 

 

 

16,429 

Goodwill

 

1,593,495 

 

 

 -

Other long-term assets

 

95,000 

 

 

100,000 

Total assets

$

6,265,019 

 

$

3,736,017 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

$

564,998 

 

$

93,806 

Advances from shareholder

 

71,844 

 

 

85,745 

Accrued expenses and other current liabilities

 

336,015 

 

 

547,569 

Current portion of capital lease obligations

 

111,794 

 

 

 -

Total current liabilities

 

1,084,651 

 

 

727,120 

Long-term liabilities

 

 

 

 

 

Deferred tax liabilities

 

25,000 

 

 

25,000 

Other long-term liabilities

 

304,350 

 

 

290,714 

Capital lease obligations, less current portion

 

335,298 

 

 

 -

Total liabilities

 

1,749,299 

 

 

1,042,834 

Commitments and contingencies

 

 -

 

 

 -

Stockholders’ equity

 

 

 

 

 

Preferred stock, $0.001 par value; 1,000,000 shares

 

 

 

 

 

authorized, none issued

 

 -

 

 

 -

Common stock, $0.001 par value; 20,000,000 shares authorized,

 

 

 

 

 

7,117,744 and 5,422,295 issued and outstanding

 

 

 

 

 

at September 30, 2012 and December 31,  2011, respectively

 

7,118 

 

 

5,422 

Additional paid-in-capital

 

108,361,099 

 

 

101,444,780 

Accumulated other comprehensive income

 

13,699 

 

 

16,881 

Accumulated deficit

 

(103,866,196)

 

 

(98,773,900)

Total stockholders’ equity

 

4,515,720 

 

 

2,693,183 

Total liabilities and stockholders’ equity

$

6,265,019 

 

$

3,736,017 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

1  


 

REMARK MED IA , INC. and SUBSIDIARIES  

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE LOSS (UNAUDITED) 

(Expressed in U.S. Dollars)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

 

 

 

 

 

 

 

 

 

 

 

 

Brands

 

$

263,119 

 

$

37,396 

 

$

320,233 

 

$

103,408 

Content and platform services to affiliates

 

 

 -

 

 

1,172,883 

 

 

 -

 

 

3,934,102 

         Total revenue

 

 

263,119 

 

 

1,210,279 

 

 

320,233 

 

 

4,037,510 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

108,382 

 

 

218 

 

 

215,542 

 

 

14,517 

Content, technology and development

 

 

608,244 

 

 

863,593 

 

 

1,307,259 

 

 

3,082,743 

General and administrative (including stock-

 

 

 

 

 

 

 

 

 

 

 

 

based compensation expense of $229,900 and

 

 

 

 

 

 

 

 

 

 

 

 

$139,471 for the three months ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

and 2011, respectively and $679,857 and $511,221

 

 

 

 

 

 

 

 

 

 

 

 

for the nine months ended September 30, 2012 and 2011,

 

 

 

 

 

 

 

 

 

 

 

 

respectively

 

 

1,328,844 

 

 

1,349,292 

 

 

3,583,020 

 

 

3,950,147 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment loss

 

 

 -

 

 

381,000 

 

 

 -

 

 

381,000 

Depreciation and amortization expense

 

 

149,689 

 

 

73,973 

 

 

202,213 

 

 

203,163 

         Total operating expenses

 

 

2,195,159 

 

 

2,668,076 

 

 

5,308,034 

 

 

7,631,570 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(1,932,040)

 

 

(1,457,797)

 

 

(4,987,801)

 

 

(3,594,060)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

    Interest expense

 

 

(11,505)

 

 

(37,075)

 

 

(38,630)

 

 

(86,443)

    Other income (expense)

 

 

(14,876)

 

 

159 

 

 

(7,769)

 

 

1,380 

         Total other income (expense)

 

 

(26,381)

 

 

(36,916)

 

 

(46,399)

 

 

(85,063)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before gain (loss) from equity-method

 

 

 

 

 

 

 

 

 

 

 

 

investments

 

 

(1,958,421)

 

 

(1,494,713)

 

 

(5,034,200)

 

 

(3,679,123)

Proportional share in loss of equity-method

 

 

 

 

 

 

 

 

 

 

 

 

investments

 

 

(739,704)

 

 

(1,143,499)

 

 

(2,553,086)

 

 

(1,624,950)

Change of interest gain of equity-method

 

 

 

 

 

 

 

 

 

 

 

 

investments  (Note 3)

 

 

 -

 

 

407,376 

 

 

2,494,990 

 

 

407,376 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss before benefit from income taxes

 

 

(2,698,125)

 

 

(2,230,836)

 

 

(5,092,296)

 

 

(4,896,697)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

 -

 

 

95,250 

 

 

 -

 

 

95,250 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,698,125)

 

$

(2,135,586)

 

$

(5,092,296)

 

$

(4,801,447)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.42)

 

$

(0.39)

 

$

(0.84)

 

$

(0.89)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average

 

 

 

 

 

 

 

 

 

 

 

 

shares outstanding

 

 

6,414,200 

 

 

5,408,455 

 

 

6,089,553 

 

 

5,401,807 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,698,125)

 

$

(2,135,586)

 

$

(5,092,296)

 

$

(4,801,447)

Cumulative translation adjustments

 

 

1,179 

 

 

(32,993)

 

 

(3,182)

 

 

(22,731)

Total comprehensive loss

 

$

(2,696,946)

 

$

(2,168,579)

 

$

(5,095,478)

 

$

(4,824,178)

The accompanying notes are an integral part of these condensed consolidated financial statements

 

2  


 

REMARK MEDIA , I N C. and SUBSIDIARIES

CONDENSED CONSOLIDATED CASH FLOWS (UNAUDITED)  

(Expressed in U.S. Dollars)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2012

 

 

2011

Cash flows from operating activities:

 

 

 

 

 

Net cash used in operating activities

$

(3,698,125)

 

$

(2,006,553)

Cash used in operating activities

 

(3,698,125)

 

 

(2,006,553)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, equipment and software

 

(641,782)

 

 

(220,706)

Increase in restricted cash

 

 -

 

 

(100,000)

Cash paid for acquisition of businesses, net of cash acquired

 

(346,189)

 

 

 -

Cash used in investing activities

 

(987,971)

 

 

(320,706)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of equity securities

 

4,251,500 

 

 

 -

Proceeds from ongoing capital raising

 

 -

 

 

100,000 

Stock issuance costs

 

(401,049)

 

 

 -

Debt issuance costs

 

 -

 

 

(20,000)

Cash provided in financing activities

 

3,850,451 

 

 

80,000 

 

 

 

 

 

 

Net change in cash and cash equivalents:

 

(835,645)

 

 

(2,247,259)

Impact of foreign currency translation on cash

 

(3,182)

 

 

(24,199)

Cash and cash equivalents at beginning of period

 

1,531,502 

 

 

4,843,893 

Cash and cash equivalents at end of period

$

692,675 

 

$

2,572,435 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2012

 

 

2011

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Acquisition of businesses:

 

 

 

 

 

Fair value of assets acquired

$

3,842,577 

 

$

 -

Less liabilities assumed

 

(1,023,619)

 

 

 -

Total purchase price

$

2,818,958 

 

$

 -

 

 

 

 

 

 

Cash consideration

$

431,250 

 

 

 -

Consideration in the form of stock

 

2,387,708 

 

 

 -

Total acquisition consideration

$

2,818,958 

 

$

 -

 

 

 

 

 

 

 

Nine Months Ended September 30,

Other non-cash financing and investing activities

 

2012

 

 

2011

Debt issuance costs in the form of warrants

$

 -

 

$

128,104 

Stock issuance costs in the form of warrants

 

133,567 

 

 

 -

Common shares issued for acquisition of business

 

2,387,708 

 

 

 -

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

 

3  


 

 

Table of Contents  

REMARK MEDIA INC. and SUBSIDIARIES  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

1.  DESCRIPTION OF BUSINESS  

 

Mission  

Our mission is to provide digital experiences that deliver content and foster connectio ns so engaging and dynamic that they inform, entertain and inspire our audiences . Our fundamentals for immersive digital experiences include: compelling content that fuels engagement, clean and intelligent organization and dynamic presentation that promotes content discovery, and intuitive discussion capabilities that generate content sharing and meaningful conversation.  

 

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 additional operations in New York, Beijing and S ã o Paulo. The Company is comprised of two distinct and complementary segments: “Brands” and “Content and Platform Services”.  

 

Remark Media is listed on The NASDAQ Capital Market and is currently in compliance with its listing standards.  The Company transferred its listing from The NASDAQ Global Market on May 31, 2011.  

 

Brands  

Our Brands segment consists of next-generation digital media properties that we develop, own and opera te.  As of the end of the third quarter 2012, this segment included our translated and localized editions of HowStuffWorks.com in China and Brazil, our personal finance destination, “DimeSpring .com , and the digital media businesses we acquired through the Banks.com merger completed on June 28, 2012. For more details, see “Banks.com Merger” below.  

 

Content and Platform Services  

Our Content and Platform Services segment provides third-party clients with content, design, and development services for their websites as well as advisory services and custom technology solutions. We also offer licensing of our proprietary web publishing and social media platforms. Our digital architects, developers and designers aim to construct a seamless connection between content and technology to create solutions that build consumer awareness, promote content engagement and foster brand-customer interactions.  Our prospective client base includes leading media and entertainment companies as well as Fortune 500 brands and boutique businesses. As examples   e ngagements under the Content and Platform segment have included the development and launch of the Dr. Oz website (http://doctoroz.com) for Sharecare ( http://www.sharecare.com ), and   the development and launch of Curiosity Online for Discovery Communications ( http://www.curiosity.com ).  

 

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 September 30, 2012 , the Company’s total cash and cash equivalents balance was approximately $ 0.7 millio n. After receipt of funding of the Term Loan Agreement discussed below , the balance of cash and cash equivalents would be approximately $1.9 7 million. The Company has incurred net losses and generated substantial negative cash flow from operations in the nine months ended September 30, 2012 and in each fiscal year since its inception and has an accumulated deficit of $ 103.9 million as of September 30, 2012 . The Company had minimal revenues in the first three quarters of 2012 due to the termination of certain agreements in the Content and Platform Services segment at the end of 2011 and its transition to owning and operating its own digital media properties.

4  


 

 

Table of Contents  

REMARK MEDIA INC. and SUBSIDIARIES  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

Since that time, the Company has been focused on building and acquiring wholly-owned digital media properties for its Brands segment and pursuing new services agreements with new customers for its Content and Platform Services segment.

 

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 and accountin g support. Remark Media and The Street will share in the revenue generated by the partnership, after TheStreet recoups certain sales, marketing, editorial and operational costs. The Company expects the agreement to provide at least $ 1.4 million in proceeds over the next twelve months.  A copy of the Services Agreement is filed with this report. 

 

On November 23, 2012 , the Company entered into a $1. 8 million Term Loan Agreement , with net proceeds expected to be $1.7 millon, 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 a n 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 Company expects the fundinf of this loan to close by November 30, 2012.  See Note 10, Subsequent Events, for a description of the terms of  such Loan Agreement.

 

Finally the Company has taken steps to reduce operating costs, primarily payr oll through a reduction in headcount , which will re sult in a decline in annual salary expense of approximately $1.2 million. The Company will contin ue to evaluate other opportunities to control costs. 

 

The Company intends to fund its future operations through a combination of revenue growth in its Brands segment, 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.

 

Absent any acquisitions of new businesses or the mate rial 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 business es , 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 addi tion, 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. T here can be no assurance that the Company will be successful at gener ating more revenues or selling any of its assets. Any failure by the Company to successfully implement these plans would have a material adver se effect on the Company’s business, including the possible inability to continue operations. 

 

Based on the Company’s current financial projections, which incorporates the Services Agreement with TheStreet, the new Term Loan Agreement, and the reduction in force, all discussed above, the Company believe s it has sufficient existing cash resources to fund operations through June   2013 .     However, projecting operating results is inherently uncertain.  Anticipated expenses can exceed those that are projected, and expense reimbursements under TheStreet Agreement could be delayed or not meet expectations. Accordingly, the Company’s cash resources could be fully utilized prior to June 2013.

 

2.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

 

Basis of Preparation  

The accompanying interim condensed consolidated financial statements for the three   and nine months ended September 30, 2012   and 2011 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, 2011 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required U.S. GAAP

5  


 

 

Table of Contents  

REMARK MEDIA INC. and SUBSIDIARIES  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

(“GAAP”) . Operating results for the three and nine months ended September 30, 2012   are not necessarily indicative of results that may be expected for any other future interim period or for the year ending December 31, 201 2 . 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 Form s 10-Q for the quarter s ended March 31, 2012 and June 30, 2012 and the Annual Report on Form 10-K for the year ended December 31, 2011.  

 

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) Technolog y Limited Liability Company, (4) BoWenWang Technology (Beijing) Limited Liability Company , (5) Banks.com, (6) My Stock Fund, and (7 ) My Dotted Ventures. Banks.com, MyStockFund and MyDottedVentures are wholly-owned subsidiaries acquired through the Banks.com’s acquisition completed on June 28, 2012 . 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.  The Company applies the guidelines set forth in Accounting Standards Codification (“ ASC ”) 810, “Consolidations” , in evaluating whether it has interests in variable interest entities (“VIE”) and in determining whether to consolidate any such entities.  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.  

 

The Company has determined that its interest in Sharecare , Inc. (“Sharecare”) is not a VIE.  As of September 30, 2012, the Company believed that it was able to exercise significant influence over Sharec are due to its level of ownership and its representation on Sharecare’s Board of Directors. Accordingly, the equity method of accounting is used to account for the investment in Sharecare.   As of October 15, 2012, Sharecare and Remark Media no longer had a common board member.  The Company is evaluating this event as it relates to the appropriate prospective accounting treatment for its investment in Sharecare.

 

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 services are provided and if the revenue arrangements meet the criteria set forth in Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition” , namely when a persuasive evidence of an arrangement exists ; services have been provided ; fees are fixed or determinable ; and collectability is reasonably assured.   

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REMARK MEDIA INC. and SUBSIDIARIES  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

             Brands Revenue.   The Company generally recognizes Brands revenue 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.  

Content and Platform Services.   Revenue from Content and Platform services is recognized 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 the second quarter 2012, and 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 has 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; c ontent, technology and development; general and administrative; and depreciation and amortization. Sales and marke ting expenses include all selling and marketing expenses such as promotions, public relations and compensation of our sales and marketing departments. Content, technology and development expenses include costs of translating and localizing content and acquiring original content written by third-parties as well as costs associated with the design, development, hosting of websites in addition to user acquisition and user retentions and compensation of our technology, content, product and web design departments which does not qualify to be capitalized. General and administrative expenses include all legal, finance, accounting and administrative expenses such as professional fees and facilities costs. Depreciation and amortization include the depreciation of our acquired fixed assets and amortization of software and definite-lived intangible assets.  

Purchase Price Allocations  

Occasionally, t he Company enters into business combinations.  In accordance to ASC 805, “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. Refer to Note   4 for further details.  

Software Development Costs  

In accordance with ASC 350-40, “Internal Use Software” and ASC 350-50, “Web 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 $ 0.6 million and $ 0.1 million, at   September 30, 2012 and December 31, 2011 , 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 no amortization reco rded for these costs during 2012 as these projects were not complete at September 30, 2012 .  

   

Stock-Based Compensation  

In accordance with ASC 718, “Compensation, Stock Compensation”, t he 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.  

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REMARK MEDIA INC. and SUBSIDIARIES  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

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.  

 

Re cent Accounting Pronouncements    

 

In September 2011, the Financial Accounting Standards B oard ("FASB”) issued Accounting Standard Update (“ASU”) No. 2011-08, “Intangibles – Goodwill and Other” (Topic 350), (“ASU 2011-08”) which simplifies how entities test goodwill for impairment. This accounting update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350.   The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted.   The Company adopted this ASU in the first quarter 2012 and the adoption had no material impact on the Company’s financial position, results of operations or cash flows.  

   

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income Topic 220” –   “Presentation of Comprehensive Income”  ( ASU 2011-05 ). ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from other comprehensive income to net income, in both net income and other comprehensive income. The standard does not change the current option for presenting components of other comprehensive income (“OCI”) gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is presented or disclosed in the notes to the financial statements. Additionally, the standard does not affect the calculation or rep orting of earnings per share.    

 

In December 2011, the FASB issued ASU 2011-12 Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”). ASU 2011-12 defers those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. The FASB has deferred those changes in order to reconsider whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. ASU 2011-12 does not impact the requirement of ASU 2011-05 to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. For public entities, ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is to be applied retrospectively, with early adoption permitted. The Company adopted these updates in the first quarter 2012 and the adoption had no impact on its financial position, results of operations or cash flows.  

   

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820)” “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”  ( ASU 2011-04 ). The amendments in this ASU result in common fair value measurement disclosure requirements between U.S. GAAP and International Financial Reporting Standards. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements. The amendments include a clarification of the FASB’s intent about the application of existing fair value measurement requirements and change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective prospectively for interim and annual periods beginning after December 15, 2011, with no early adoption permitted. The Company adopted the update in the first quarter of 2012 and the adoption had no material impact on its financial position, results of operations or cash flows.  

   

Effective January 1, 2011, the Company adopted ASU No. 2009-13, “Revenue Recognition (Topic 605)” “Multiple-deliverables revenue arrangements”  ( ASU 2009-13 ). This update provides that, when vendor-specific objective evidence or third party evidence of selling price is not available, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration based on the relative selling prices of the separate deliverables (the “relative selling price method”). The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. The Company concluded that the adoption of ASU 2009-13 did not have a material impact on its financial position, results of operations or cash flows, as the guidance applied to revenue arrangements with multiple deliverables, which were not significant.

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REMARK MEDIA INC. and SUBSIDIARIES  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

 

3 .     INVESTMENT IN S HARECARE  

 

As of September 30, 2012 , Remark Media owns approximately 10.9 % of the outstanding common stock of Sharecare. The Company accounts for its equity interest in Sharecare under the equity method of accounting, as Remark Media has the ability to exercise significant influence over Sharecare due to its seat on the Sharecare board of directors. Under this method, the Company records its proportionate share of Sharecare’s net income or loss based on the financial results of Sharecare. The Company continues to evaluate the facts and circumstances related to its investment to assess the need for change in its accounting method in future periods .  

 

During the first and second quarters of 2012 , Sharecare issued additional equity in exchange for assets. As a result, R emark Media recorded a gain of $ 2.5 million in the nine months ended September 30, 2012 due to the change in interest ownership.

 

The difference between the carrying amount of Remark Media’s investment balance in Sharecare and its proportionate share of Sharecare's underlying net assets was approximately $ 3.1 million as of September 30, 2012 .  The difference is characterized as goodwill and is subject to review in accordance with ASC 323 – “Investments – Equity Method and Joint Ventures ” for other than temporary decline in value. The investment balance in Sharecare reflects the intercompany profit elimination.  

 

The following table shows selected unaudited financial data of Sharecare including Remark Media’s proportional share of net loss in Sharecare prior to the elimination of our portion of intercompany profit included in Sharecare’s ear nings for the three and nine months ended September 30, 2011 of approximately $ 40 thousand and $ 123 thousand, respectively. There was no intercompany profit for the three and six months ended September 30, 2012 :    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2012

 

2011

 

2012

 

2011

Revenues

$

8,098,607 

 

$

3,063,490 

 

$

20,811,061 

 

$

8,712,780 

Gross profit

 

7,292,016 

 

 

2,540,731 

 

 

18,875,347 

 

 

7,179,804 

Loss from operations

 

(6,316,021)

 

 

(3,301,144)

 

 

(20,351,056)

 

 

(8,013,529)

Net loss

 

(6,466,551)

 

 

(3,763,083)

 

 

(20,637,135)

 

 

(8,727,767)

Proportional share of investee loss

 

(739,704)

 

 

(1,143,499)

 

 

(2,553,086)

 

 

(1,624,950)

 

 

 

 

 

 

 

 

 

 

 

 

 

4. ACQUISITIONS  

 

On J une 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.  

 

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 business strategy.  

 

Allocation of purchase price  

 

The application of purchase accounting under ASC 805 – “Business Combinations”, requires that the total purchase price be allocated to the fair value of assets acquired and liabilities assumed based on their fair values at the acquisition date. The allocation process requires an analysis of acquired various assets and assumed liabilities such as contracts, customer relationships, contractual commitments and legal contingencies to identify and record the fair value of all assets acquired and liabilities assumed. In valuing

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

acquired assets and assumed liabilities, fair values are based on, but are not limited to: available market data, future expected cash flows; current replacement cost for similar capacity for certain assets; and appropriate discount rates and growth rates.  

 

Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses.  Goodwill, which is not amortizable and not tax deductible, resulting from the acquisitions discussed below was assigned to the Brands segment.  

 

 

 

 

 

 

 

 

 

 

 

 

Tangible assets

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

$

281,038 

 

Fixed assets

 

 

 

 

 

 

 

54,358 

 

Other long-term assets

 

 

 

 

 

 

 

53,686 

 

Total tangible assets

 

 

 

 

 

 

 

389,082 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

 

 

 

 

 

680,000 

 

Domain names

 

 

 

 

 

 

 

1,180,000 

 

Goodwill

 

 

 

 

 

 

 

1,593,495 

 

Total intangible assets

 

 

 

 

 

 

 

3,453,495 

 

 

 

 

 

 

 

 

 

 

 

Liabilities assumed

 

 

 

 

 

 

 

(1,023,619)

 

Total consideration

 

 

 

 

 

 

$

2,818,958 

 

 

The total consideration of the transaction was $ 2.8 million comprised of the fair value of 702,267 common shares calculated based on the quoted price of $3.40 per share, $300,000 in cash and $131,250 in cash paid to settle the promissory note in the principal amount of $125,000 and related unpaid interest. 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 table below is subject to change in future periods as the Company has not yet completed its review of the current assets and liabilities.  

 

 

The a cquisition transactions costs incurred in the nine months ended September 30, 2012 were all expensed and totaled $ 0.2   million. These expenses are included under the general and administrative expenses in the consolidated statements of operations for the nine months ended September 30, 2012 .   Banks.com’s revenue since the acquisition effective date through the nine months ended September 30, 2012 totaled approximately $ 278 thousand and has been included in the Company’s consolidated statements of operations for those periods.  

 

The table below reflects a summary of the u naudited pro forma results of operations data for three and nine months ended September 30, 2012 and 2011 as if Remark Media and Banks.com and its subsidiaries had been combined as of January 1, 2011 . 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 occur red if the business combination had been in effect on the date indicated, or which may result in the future.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unaudited pro forma results of operations

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2012

 

2011

 

2012

 

2011

Revenues

$

263,119 

 

$

1,823,279 

 

$

2,192,737 

 

$

8,009,510 

Operating loss

 

(1,932,040)

 

 

(2,401,797)

 

 

(5,102,088)

 

 

(4,657,060)

Net loss

 

(2,698,125)

 

 

(3,102,586)

 

 

(5,907,295)

 

 

(5,991,447)

 

5.  SEGMENTS  

 

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assess ing performance.  Because of Remark Media’s integrated business structure, operating costs included in one segment can benefit other segments, and therefore these segments are not designed to measure operating income or loss directly related to the products included in each segment.  Reconciling amounts include adjustments to conform with U.S. GAAP and corporate-level activity not specifically

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

attributed to a segment.  Corporate expenses include, among other items: corporate-level general and administration costs, content, design, technology costs and on-going maintenance charges; share-based compensation expense related to stock and stock option grants; depreciation and amortization expense; impairment loss, if any, and interest expense and income .  

 

The Company has reported two segments for the three and nine months ended September 30, 2012 and 2011 : Brands (formerly digital online publishing) and Content and Platform Services (formerly web platform services). The Brands segment consists of the business related to the Banks.com acquisition completed on June 28, 2012 which generates revenues in the United States and the websites related to the operations in Brazil and China which generate revenues from advertisers based in the respective countries . The Content and Pla tform Services segment consisted in 2011   of the services provided to Remark Media’s affiliates, Sharecare and Discovery , Inc. (“Discovery”) . These services are related to the design, development, hosting and related services necessary to launch and operate websites for Sharecare and Discovery through the Company’s direct activities and management of third party vendors.      

 

Op erating results regarding reportable segments for the three months and nine months ended September 30, 2012 and 2011   are presented in the following tables:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brands

 

Content and Platform Services

 

Corporate

 

Total

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

263,119 

 

$

 -

 

$

 -

 

$

263,119 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(27,084)

 

 

 -

 

 

(1,904,956)

 

 

(1,932,040)

Interest expense

 

 

 -

 

 

 -

 

 

(11,505)

 

 

(11,505)

Other income (expense) including

 

 

 

 

 

 

 

 

 

 

 

 

loss on equity-method investment

 

 

(210)

 

 

 -

 

 

(754,370)

 

 

(754,580)

Net loss

 

$

(27,294)

 

$

 -

 

$

(2,670,831)

 

$

(2,698,125)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brands

 

Content and Platform Services

 

Corporate

 

Total

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

37,396 

 

$

1,172,883 

 

$

 -

 

$

1,210,279 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

(166,355)

 

 

405,496 

 

 

(1,696,938)

 

 

(1,457,797)

Interest expense

 

 

(49)

 

 

 -

 

 

(37,026)

 

 

(37,075)

Other income (expense) including

 

 

 

 

 

 

 

 

 

 

 

 

loss on equity-method investment

 

 

3,644 

 

 

 -

 

 

(644,358)

 

 

(640,714)

Net (loss) income

 

$

(162,760)

 

$

405,496 

 

$

(2,378,322)

 

$

(2,135,586)

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brands

 

Content and Platform Services

 

Corporate

 

Total

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

320,233 

 

$

 -

 

$

 -

 

$

320,233 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(147,924)

 

 

 -

 

 

(4,839,877)

 

 

(4,987,801)

Interest expense

 

 

 -

 

 

 -

 

 

(38,630)

 

 

(38,630)

Other income including

 

 

 

 

 

 

 

 

 

 

 

 

loss on equity-method investment

 

 

4,951 

 

 

 -

 

 

(70,816)

 

 

(65,865)

Net loss

 

$

(142,973)

 

$

 -

 

$

(4,949,323)

 

$

(5,092,296)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brands

 

Content and Platform Services

 

Corporate

 

Total

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

103,408 

 

$

3,934,102 

 

$

 -

 

$

4,037,510 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

(589,285)

 

 

1,265,606 

 

 

(4,270,381)

 

 

(3,594,060)

Interest expense

 

 

(49)

 

 

 -

 

 

(86,394)

 

 

(86,443)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense including loss on equity-method investment

 

 

3,266 

 

 

 -

 

 

(1,124,210)

 

 

(1,120,944)

Net (loss) income

 

$

(586,068)

 

$

1,265,606 

 

$

(5,480,985)

 

$

(4,801,447)

 

 

Total assets regarding reportable segments at September 30 , 2012 and December 31, 2011 are presented in the following table:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

 

Total assets:

 

 

 

 

 

Content and Platform Services

$

 -

 

$

118,503 

Brands

 

4,545,860 

 

 

302,129 

Business segments

 

4,545,860 

 

 

420,632 

Corporate

 

1,719,159 

 

 

3,315,385 

Total assets

$

6,265,019 

 

$

3,736,017 

 

6. 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 September 30, 2012 ,   t otal oblig ations under this agreement were $0.5 million, $0.1 million of which is included under the current portion of capital lease obligations and the remain der is included under capital lease obligations, net of current portion of the Company’s consolidated balance sheets at September 30, 2012 .   The following table represents the approximate future minimum capital lease payments due under this agreement as of September 30, 2012 :  

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Lease

 

 

 

 

Commitments

 

 

 

 

 

October 2012 through December 2012

 

 

$

42,822 

2013

 

 

 

171,287 

2014

 

 

 

171,287 

2015

 

 

 

171,287 

Total commitments

 

 

 

556,683 

Interest on capital leases

 

 

 

(109,591)

Present value of minimum capital lease payments

 

 

$

447,092 

 

 

 

 

 

 

 

 

7. C OMMITMENTS AND CONTINGENCIES  

 

On July 23, 2012, a complaint was filed by FOLIO fn , Inc. (“FOLIO fn ”), against the Company’s subsidiary MyStockFund Securities, Inc. (“MyStockFund ”), alleging that MyStockFund has infringed six U.S. Patents held by FOLIO fn relating to investment methods. The complaint seeks injunctive relief, damages, pre-judgment interest, and attorneys' fees. The Company believes that MyStockFund has meritorious defenses to th e complaint, and MyStockFund intends to contest the claims .  

 

In addition, the Company is engaged from time to time in certain legal disputes arising in the ordinary course of business.   Furthermore , the Company accrue s 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.

 

8 .  STOCKHOLDERS’ EQUITY AND NET LOSS PER SHARE  

 

Issuance of Common Shares  

 

As stated in Note 1 of the condensed consolidated financial statements, in February 2012, the Company issued 944,777 common shares and warrants to acquire 236,194 common shares through a private placement in exchange of cash in the amount of $4.25 million. The warrants have a term of five years and six months and are not exercisable during the first six months after issuance. The exercise price of the warrants is $6.81 per share. The Company determined the fair value of the warrants at $4.87 per share using the Black-Scholes method. Because the common shares were issued in conjunction with the warrants in exchange for the proceeds received, and both securities were classified as equity, the Company was required to allocate proceeds between the common shares and the warrants based on their relative fair values. As a result, t he Company allocated $0.67 million to the value of the warrants and $3.58 million to the value of the common shares. The Company also paid a placement agent fee of 7% of the proceeds of the offering, approximately $0.3 million, and issued a three-year warrant to the placement agent to purchase up to an aggregate of 35,429 shares of Common Stock at an exercise price of $7.46 per share. The warrants were valued using the Black-Scholes method at $3.77 per share and classified as equity. The Company also paid an additional $0.1 million for stock issuance costs. The stock issuance costs which amounted to $0.4 million along with the value of the warrants issued to the placement agent of $0.13 million were charged to additional paid in capital.  

 

In addition, as discussed in Note 1 and Not e 4 of the condensed consolidated financial statements, on June 28, 2 012, the Company issued 702,267   shares of common stock pursuant to the acquisition of Banks.com. The Company recorded the fair value of the common stock at $3.4 0 per share based on the closing price of Remark Media’s common stock on the effective date of the acquisition. On April 2, 2012, the Company issued 32,405 common shares in connection with the cashless exercise of the warrants to purchase 65,359 common shares issued in 2011 in connection with the debt agreement entered into with Theorem Capital which expired in March 2012.    

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

 

  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 September 30,

 

Nine Months Ended September 30,

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net  loss

 

$

(2,698,125)

 

$

(2,135,586)

 

$

(5,092,296)

 

$

(4,801,447)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

6,414,200 

 

 

5,408,455 

 

 

6,089,553 

 

 

5,401,807 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net  loss per share, basic and diluted

 

$

(0.42)

 

$

(0.39)

 

$

(0.84)

 

$

(0.89)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares and dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

6,414,200 

 

 

5,408,455 

 

 

6,089,553 

 

 

5,401,807 

Dilutive securities

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Total common shares and dilutive securities

 

 

6,414,200 

 

 

5,408,455 

 

 

6,089,553 

 

 

5,401,807 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 wa s   1,435,349 and 1,115,538 for the three and   nine periods ended September 30, 2012 and 2011 , 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.  

 

 

In accordance with the current authoritative guidance ,   the Company measures stock-based compensation cost at the grant date based on the fair value of the award, and recognize s it as an expense over the requisite service period.  Stock-based compensation expense for the three months ended September 30, 2012 and 2011 was approximately $0.23 million and $0.14 million , respectively .   For the nine months ended September 30, 2012 and September 30, 2011 , stock-base d compensation expense was $0.70 million and $0.51 million, respectively. A n expense of $49 thousand was included in the stock compensation expense for the nine months ended September 30, 2012 related to the modification in the terms of exercising of 66,575 shares of stock option grants in the first quarter of 2012 .   As of September 30, 2012 , unrecognized compensation expense relating to non-vested stock options approximated $ 1.2 million, which we expect to recognize through 2015 .     During the   nine months ended   September 30, 2012 ,   Remark Media granted options to purchase 241,927 shares at a   weighted average exercise price of $ 5.83 .   The grant date fair value of grant options vesting during the three   months ended September 30, 2012 and 2011 was   approximately $ 0.18 million and $ 0.11 million, respectively and during the nine months ended September 30, 2012   and 2011 was approximately $ 0.33 million and $ 0.17 million respectively. Additionally, the Company granted 16,000 shares of restricted stock related to director compensation plans for 2012 .  Through   September 30, 2012 , no options have been exercised under the 2006 Plan or the 2010 Plan .

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

(Expressed in U.S. Dollars)

 

9 RELATED PARTY TRANSACTIONS  

 

On October 30, 2009, the Company entered into and effectuated a series of transactions with Sharecare, a related party.  As a result of these transactions, the Company received an equity stake in Sharecare, sold substantially all of the assets of its DailyStrength subsidiary to Sharecare, agreed to provide management and website development services to Sharecare, and received a limited license to use the Sharecare web platform for its own businesses.  Additionally, the Company issued a promissory note to Sharecare, all of which was settled by services the Company provided to Sharecare during 2009.  As of September 30, 2012 , Remark Media owned approximately 10.9 % 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., the Company’s largest stockholder, is a significant stockholder of Sharecare.     

 

The Company’s service agreement with Sharecare expired on December 31, 2011 . As a result, the Company did not have any revenues generat ed from Sharecare during the nine months ended September 30, 2012 . The Company’s revenue from Sharecare for the three and nine months ended September 30, 2011 totaled approximately $ 0.9 million and $ 3.0 million, respectively.   Additionally, there were no amounts due from Sharecare at September 30, 2012 .  

   

In April 2010, the Company entered into an agreement with Discovery Communications, LLC, an affiliated entity, to provide website development services to Discovery. The agreement expired in December 31, 2011 .  As a result, the Company did not have any revenues generated from Discovery during the nine months ended September 30, 2012 . The Company’s Content and Platform Services revenue from Discovery, an affiliated entity, for the three months and nine months ended September 30, 2012 totaled approximately $ 0.3 million and $ 1.0 million, respectively, and there were no amounts due from Discovery at September 30, 2012 .  

 

In March 2010, the Company entered into a 24-month sublease agreement with Sharecare for rental of our corporate headquarters in Atlanta, Georgia, effective March 1, 2010.   On August 1, 2011, the Company mutually agreed to end the sublease agreement prior to the contracted termination date.   Rent expense related to this agreement for the six months ended June 30, 2011, was approximately $ 0.1 million.    

 

As of September 30, 2012 , the Company had an outstanding liability due to its affiliate, Discovery, of approximat ely $0.1 million.

 

10 .   SUBSEQUENT EVENTS 

 

On October 15, 2012, Scott Booth and Gregory M. Swayne resigned from the Company’s Board of Directors (the “Board”).  Mr. Booth was also a member of the Audit Committee and was the Chairman of the Compensation Committee.  The resignations resulted from disagreements among the members of the Board and executive management regarding the future strategic and financial direction of the Company.  The remaining members of the Board of Directors intend to appoint a t least two independent director s to the Board in the near future. 

 

The Company’s Board of Directors app ointed Kai-Shing Tao as Chairman of the Board and Co-Chief Executive Officer of the Company, on October 16, 2012, and effective the same day.  Mr. Tao has been a member of the Board since the Company’s formation in 2007.  Mr. Tao will serve as the Company’s principal executive officer and principal financial officer, and will not draw a sa lary.  Carrie B. Ferman , formerly Chief Executive Officer of the Company, was appointed Co-Chief Executive Officer by the Board, on October 16, 2012 and effective the same day. 

 

On October 16, 2012, each of the three executive officers of the Company agreed to reduce their base salary compensation to $150,000 per year, in support of the Company’s growth plans, effective October 1, 2012.  All executive compensation agreements have been modified in accordance with the base salary adjustments. 

 

On October, 29, 2012, Eric Orme, became an advisor and consultant to the Company, with a specific focus on advising the Company related to its technology strategy.  Mr. Orme was previously Chief Technology Officer of the Company, and resigned such role on October 24, 2012. 

 

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 and accounting support. Remark Media and The Street will share in the revenue generated by the partnership, after TheStreet recoups certain sales, marketing, editorial and operational costs. The Company

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(Expressed in U.S. Dollars)

 

expects the ag reement to provide at least $1.4 million in proceeds over the next twelve months.  A copy of the Services Agreement is filed with this report.   

 

On November 23, 2012, the Company issued a $1.8 million Senior Secured Convertible Promissory Note (the “Note”) to a lender controlled by and in part owned by Mr. Kai-Shing Tao, the Company’s Chairman a nd Co-Chief Executive Officer.  Mr. Tao has been a director of the Company since 2007. The Note was approved by th e Audit Committee of the Board, which believes the related party transaction was negotiated as an arms-length transaction. . The terms of the Note include:  

 

·

Interest accrues at 6.67% on an annual basis, payable quarterly.  

 

·

All principal and any accrued and unpaid interest is due and payable in full on the second anniversary of the Note.  

 

·

The repayment of all principal and accrued and unpaid interest is secured by all assets of the Company other than the common shares of Sharecare, Inc. owned by the Company.  

 

·

All principal and accrued interest is convertible at any time at the election of the Lender at the rate of $1.30 of principal and interest for each share of Company common stock.  

 

The Company expects the funding of this loan to close by November 30, 2012. &n