REMARK HOLDINGS, INC. AND SUBSIDIARIES
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. ORGANIZATION AND BUSINESS
Organization and Business
Remark Holdings, Inc. and subsidiaries (“Remark”, “we”, “us”, or “our”), which include its consolidated variable-interest entities ("VIEs"), are primarily technology-focused. Our KanKan social media data intelligence platform serves as the basis for our development and deployment of artificial-intelligence-based solutions for businesses and software developers in many industries and geographies. We also own and operate digital media properties across multiple verticals, such as travel and entertainment and young adult lifestyle, and personal finance, that deliver relevant, dynamic content that attracts and engages users on a global scale. Our common stock is listed on the Nasdaq Capital Market under the ticker symbol MARK.
Liquidity Considerations
During the ninethree months ended September 30, 2017,March 31, 2018, and in each fiscal year since our inception, we have incurred net losses and generated negative cash flow from operations, resultingwhich have resulted in an accumulated deficit of $210.7$313.7 million and aas of March 31, 2018. Additionally, our operations have historically used more cash than they have provided. As of March 31, 2018, our cash and cash equivalents balance of $16.0was $21.9 million, both amounts as of September 30, 2017. Also as of September 30, 2017,and we had a negative working capital balance of $58.2$29.4 million. Our net revenue during the ninethree months ended September 30, 2017March 31, 2018 was $52.0$16.7 million.
During the ninethree months ended September 30,March 31, 2017, we issued a total of 3,052,897382,308 shares of our common stock to private investors in exchange for approximately $8.3$1.3 million in cash. We did not make similar issuances of our common stock during the three months ended March 31, 2018.
On November 9, 2016, we entered into a common stock purchase agreement (as amended, the “Aspire Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, we may sell to Aspire Capital is committed to purchase up to an aggregate of $20.0 million of shares of our common stock over the 30-month term of the Aspire Purchase Agreement. On September 18, 2017, we entered into a First Amendment to the Aspire Purchase Agreement, which provides that the parties may mutually agree to increase the number of shares of our common stock that may be purchased per business day pursuant to the terms of the Aspire Purchase Agreement to 2,000,000 shares. A portionAs of theMarch 31, 2018, Aspire has purchased $12.8 millionof shares of our common stock we issued during the nine months ended September 30, 2017 was issued pursuant tounder the Aspire Purchase Agreement.
We are a party to a financing agreement dated as of September 24, 2015 (as amended, the “Financing Agreement”) with certain of our subsidiaries as borrowers (together with Remark, the “Borrowers”), certain of our subsidiaries as guarantors (the “Guarantors”), the lenders from time to time party thereto (the “Lenders”) and MGG Investment Group LP, in its capacity as collateral agent and administrative agent for the Lenders (“MGG”), pursuant to which the Lenders initially extended credit to the Borrowers consisting of a term loan in the aggregate principal amount of $27.5$35.5 million (the “Loan”). On September 20, 2016, we entered into Amendment No. 1 to Financing Agreement (the “Financing Amendment”) which, among other changes, increased the Loan by $8.0 million to a total aggregate principal amount of $35.5 million. The terms of the Financing Agreement, the amendments thereto, and related documents effective as of March 31, 2018 are described in Note 1011.
As of September 30, 2017, we were not in compliance with Changes to the covenant underterms of the Financing Agreement requiring minimum consolidated EBITDAmade after the end of Remark and its subsidiaries for the trailing twelve-month period ended September 30, 2017 of $(1.5) million, as our actual consolidated EBITDA for such period was $(4.4) million. As explainedcovered by this report are described in Note 15, the Lenders waived specified events of default under the Financing Agreement, including with respect to (i) minimum consolidated EBITDA of Remark and its subsidiaries for the trailing twelve-month periods ended June 30, 2017 and September 30, 2017, (ii) minimum value of certain of our assets for the fiscal quarters ended June 30, 2017 and September 30, 2017, and (iii) minimum restricted cash balance through September 19, 2017.16.
We cannot provide assurance that revenue generated from our businesses will be sufficient to sustain our operations in the long term; therefore, we have implemented measures to reduce operating costs, and we continuously evaluate other opportunities to reduce costs. Additionally, we are actively assessing the sale of certain non-core assets, considering sales of minority interests in certain of our operating businesses, and evaluating potential acquisitions that would provide additional revenue. However, we may need to obtain additional capital through equity financing, debt financing, or by divesting of certain assets or businesses. Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions, will play primary roles in determining whether we can successfully obtain additional capital. Additionally, pursuant to the Financing Agreement, we are subject to certain limitations on our ability and
the ability of our subsidiaries to, among other things, incur additional debt and transfer, sell or otherwise dispose of assets, without the consent of the Lenders. We cannot be certain that we will be successful at raising additional capital.
A variety of factors, many of which are outside of our control, affect our cash flow; those factors include regulatory issues, competition, financial markets and other general business conditions. Based on our historical track record and projections, we believe that we will be able to meet our ongoing requirements through September 30, 2018March 31, 2019 (including repayment of our existing debt as it matures) with existing cash, cash equivalents and cash resources, and based on the probable success of one or more of the following plans:
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| — | monetize existing assets | |
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| — | work with our creditors to modify existing arrangements or refinance our debt | |
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| — | obtain additional capital through equity issuances, including but not limited to equity issuances to Aspire Capital under its existing purchase commitment (which equity issuances may dilute existing stockholders) | |
| | |
monetize existing assets
work with our creditors to modify existing arrangements or refinance our debt
obtain additional capital through equity issuances, including but not limited to equity issuances to Aspire Capital under its existing purchase commitment (which equity issuances may dilute existing stockholders)
However, projections are inherently uncertain and we cannot assure you that we will generate sufficient income and cash flow to meet all of our liquidity requirements.
Comparability
We reclassified an amount in the December 31, 2016 Consolidated Balance Sheet to conform to the current presentation as of September 30, 2017.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2017,March 31, 2018, with the audited Consolidated Balance Sheet amounts as of December 31, 20162017 presented for comparative purposes, and the related unaudited Condensed Consolidated Statements of Operations and Statements of Cash Flows in accordance with the instructions for Form 10-Q. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.
Our results of operations and our cash flows as of the end of the interim periods reported herein do not necessarily indicate the results we may experience for the remainder of the year or for any other future period.
Management believes that we have included all adjustments (including those of a normal, recurring nature) considered necessary to fairly present our unaudited Condensed Consolidated Balance Sheet as of September 30, 2017,March 31, 2018, our unaudited Condensed Consolidated Statements of Operations and our unaudited Condensed Consolidated Statements of Cash Flows for all periods presented. You should read our unaudited condensed consolidated interim financial statements and footnotes in conjunction with our consolidated financial statements and footnotes included within ourthe Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016"2017 Form 10-K”).
Consolidation
We include all of our subsidiaries, which include the variable-interest entities for which we are the primary beneficiary, in our consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation. The
To comply with China’s laws which restrict foreign ownership of entities that operate within industries deemed sensitive by the Chinese government, we employ what we believe is a commonly-used organizational structure consisting of a wholly-foreign owned enterprise (“WFOE”) and the VIEs to operate our KanKan business. We own 100% of the equity of certainthe WFOE, while the VIEs are companies formed in China under local laws which are owned by members of our subsidiaries is either partially or fully held by citizensmanagement team. We funded the registered capital and operating expenses of the countryVIEs by extending loans to the VIEs’ owners. We believe that we are the primary beneficiary of incorporationthe VIEs because the equity holders of such entities do not have significant equity at risk and because we have been able to comply with local laws and regulations.direct the operations of the VIEs.
Use of Estimates
We prepare our consolidated financial statements in conformity with GAAP. While preparing our financial statements, we make estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and accompanying notes. Accordingly, actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, intangible assets, the useful lives of property and equipment, stock-based compensation, the fair value of the warrant liability, income taxes, inventory reserve and purchase price allocation, among other items.
Changes to Significant Accounting Policies - Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, and all subsequent amendments (collectively “ASC 606”) using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of Accumulated deficit (the amount was not material). We have not retrospectively adjusted the information for the comparative period reported herein, which information we continue to report under the accounting standards in effect for that period. The amounts of revenue, accounts receivable and contract balances that we reported under ASC 606 as of and for the three months ended March 31, 2018, were not materially different than the amounts we would have reported under the accounting standards previously in effect.
We recognize revenue when we transfer control of the promised goods or services to our customers, and we recognize an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.
When customers pay us prior to when we satisfy our obligation to transfer control of promised goods or services, we record the amount that reflects the consideration to which we expect to be entitled as a contract liability until such time as we satisfy our performance obligation. As a result of our adoption of ASC 606, the line item previously labeled “Deferred revenue” on our condensed consolidated balance sheets is now labeled “Contract liability”; the comparative period balance as reported herein did not change as a result of our application of the modified retrospective transition approach.
For our contracts with customers, we only extend short-term credit policies to our customers, generally of 90 days or less.
We record the incremental costs of obtaining contracts as an expense when incurred, because such costs would otherwise be amortized over a period of less than one year if capitalized.
Transaction Services
Our Travel & Entertainment segment generates our Transaction Services revenue, primarily using an agency model. To a lesser extent, we use a merchant model when we directly provide tour services to customers.
Under the agency model, various service providers with whom we maintain relationships are ultimately responsible for delivering the underlying services for which our customers transact, such as lodging, air travel, entertainment, or tours. Our obligation to our customers is to arrange for these service providers to provide the underlying services, and we satisfy our obligation at the point in time that these service providers begin to provide the underlying service (e.g., upon the check-in date for lodging stays, upon the show/performance date for entertainment transactions, etc.). We recognize revenue from transactions under this model on a net basis (i.e., the amount charged to our customers less the amounts we pay to the service providers).
Under the merchant model, we provide tour services directly to our customers. Our obligation to provide the tour services is satisfied at the point in time that we finish providing the tour. For transactions occurring under this model, we recognize revenue on a gross basis.
Under either model, our customers pay at the time the original transaction occurs via our sales channels, primarily the Vegas.com website and mobile application. Because the original transaction date almost always precedes the date that our performance obligation is satisfied, we record a contract liability for the amount of consideration received. In general, we satisfy most of our performance obligations within approximately three to four months from the original transaction date, and substantially all performance obligations are satisfied within one year from the original transaction date.
Data Platform Services
Our KanKan business generates our Data Platform Services revenue. Using our proprietary data intelligence software, we screen potential loan candidates to provide only high-quality loan candidates to affiliates of banks and other lending institutions in China. We earn a commission for our service and we recognize that commission at the point in time at which a loan is issued by the lending institutions to a loan candidate provided by us in an amount we determine by multiplying the commission rate specified in our contracts with the affiliates of the banks and other lending institutions by the amount of such loans issued to loan candidates we have provided.
Per our contracts with the affiliates of the banks and other lending institutions, we may be required to reimburse the affiliates of such lending institutions for a certain percentage of any loan defaults. We have determined that the portion of such contracts potentially requiring us to reimburse our customers represents a guarantee, the accounting for which is not within the scope of ASC 606. As a result, we account for such guarantee using other GAAP and record an initial liability equal to the total potential amount that we could be required to reimburse upon default, which approximates fair value. We initially record the liability in Accrued expense and other current liabilities in our consolidated balance sheets. As we are released from our obligation to perform under the guarantee, we record the amount of reduction in the guarantee liability as Data Platform Services revenue. We have not yet recorded material amounts of revenue resulting from being released from our guarantee obligation.
Advertising and Other
Our Travel & Entertainment segment generates the majority of our advertising revenue, and we report the remaining amount of advertising revenue in Corporate Entity and Other in our segment information. We primarily generate advertising revenue from the use of sponsored links and display advertising placed directly on our website pages. Substantially all of our advertising contracts with customers are completed within one year or less.
In click-through advertising contracts with customers, our obligation is to place our customers’ interactive ads on our websites for a specified period of time. We recognize revenue from click-through advertising at the point in time at which visitors to our websites click through the ads to our advertising customers’ websites. Any variability regarding contract consideration is resolved within the reporting period.
Some of our advertising contracts with customers require us to place our advertising customers’ static display ads on our websites for a specified period of time or in a specific location on our websites, or both. We recognize revenue from such advertising placement arrangements either over time (ratably over the contract term) or based upon the delivery of advertising impressions, depending upon the terms of the contract.
We also generate revenue from other sources, such as from e-commerce activity in which we sell goods to our customers, or media production which involves us producing video or Internet-based content for our customers. We recognize the revenue from these contracts at the point in time when we transfer control of the good sold to the customer or when we deliver the promised media content.
Other than as noted above, we have made no material changes to our significant accounting policies as reported in our 20162017 Form 10-K.
Recently Issued Accounting Pronouncements
In July 2017,February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-11, Accounting for Certain Financial Instruments with Down Round Features, which changes how an entity determines whether certain financial instruments should be classified as liabilities or equity instruments. Under ASU 2017-11, a down round feature no longer precludes equity classification when an entity assesses whether the instrument is indexed to the entity's own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments also require entities to recognize the effect of the down round feature as a dividend when the feature is triggered (which would affect the presentation of earnings per share) and they clarify existing disclosure requirements for equity-classified instruments. For us, the amendments in ASU 2017-11 will become effective on January 1, 2019, and early adoption is permitted. Although our evaluation of the impact the guidance will have on our consolidated financial statements, results of operations and cash flows is ongoing, we believe that application of ASU 2017-11 may reduce the amount we report as Warrant liability on our future balance sheets, as well as the amount of change to that liability that we report in our future statements of income.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which changes GAAP primarily by requiring lessees to recognize, at lease commencement, a lease liability representing the present value of the lessee’s obligation to make lease payments, and a right-of-use asset representing the lessee’s right to use (or control the use of) a specified asset during the lease term, for leases classified as operating leases. For us, the amendments in ASU 2016-02 will become effective on January 1, 2019, and early adoption is permitted. We are currently evaluating the impact that application of ASU 2016-02 will have on our consolidated financial statements, results of operations and cash flows.
In May 2014,flows; however, we expect the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single, comprehensive model for an entity to use to ensure that it recognizes revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expectsimpact to be entitled in exchange for those goods or services. For us, the amendments in ASU 2014-09 are effective for fiscal years beginning after December 15, 2017, including interim periods therein. Based upon our analysis of existing contractsmaterial, as we will be recording assets and liabilities related to date, we do not believe that this guidance will have a material effect upon the financial condition, results of operations, cash flows or reporting thereof for severalmost of our existing subsidiaries due to the type and low volumeleases, including our leases for office space, which we currently account for as operating leases.
We have reviewed all recently issued accounting pronouncements. The pronouncements that we have already adopted did not have a material effect on our financial condition, results of operations, cash flows or reporting thereof, and except as otherwise noted above, we do not believe that any of the pronouncements that we have not yet adopted will have a material effect upon our financial condition, results of operations, cash flows or reporting thereof.
NOTE 3. BUSINESS ACQUISITIONSREVENUE
China Branding Group Limited
We completed the acquisition (the “CBG Acquisition”) of assets of China Branding Group Limited (“CBG”) on September 20, 2016. The aggregate consideration of $15.4 million included $7.4 million of cash and the future issuance of seven-year warrants (the “CBG Acquisition Warrants”)are not required to purchase 5,750,000 sharesinclude disclosures related to remaining performance obligations because substantially all of our common stock at $10.00 per share, subject to certain anti-dilution adjustments. For more information regarding the CBG Acquisition, see Note 3 to the Consolidated Financial Statements in our 2016 Form 10-K.contracts with customers have an original expected duration of one year or less.
Disaggregation of Revenue
The following table presents a disaggregation of our final allocation ofrevenue by major category for the purchase consideration we paid to the net tangible and intangible assets we acquired based on their estimated fair values on the closing date of the CBG Acquisitionthree months ended March 31, 2018 (in thousands):
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| | | | | | | | | | | |
| | Preliminary Purchase Price Allocation | | | | Final Purchase Price Allocation |
| | September 30, 2016 | | Adjustments | | September 30, 2017 |
| Cash and cash equivalents | $ | 70 |
| | $ | (10 | ) | A | $ | 60 |
|
| Accounts receivable | 365 |
| | (42 | ) | B | 323 |
|
| Other current assets | 17 |
| | — |
| | 17 |
|
| Total current assets | $ | 452 |
| | $ | (52 | ) | | $ | 400 |
|
| Intangibles | 9,206 |
| | (1,772 | ) | C | 7,434 |
|
| Total identifiable assets acquired | $ | 9,658 |
| | $ | (1,824 | ) | | $ | 7,834 |
|
| Accounts payable | 378 |
| | 65 |
| D | 443 |
|
| Taxes payable | — |
| | 298 |
| E | 298 |
|
| Deferred revenue | 145 |
| | — |
| | 145 |
|
| Other current liabilities | 12 |
| | 94 |
| F | 106 |
|
| Net identifiable assets acquired | $ | 9,123 |
| | $ | (2,281 | ) | | $ | 6,842 |
|
| Goodwill | 6,270 |
| | 2,281 |
| | 8,551 |
|
| Total purchase consideration | $ | 15,393 |
| | $ | — |
| | $ | 15,393 |
|
In the table above, we note the adjustments we made during the period between our preliminary allocation of the purchase price and our final allocation of the purchase price, based on additional information we obtained which indicated that:
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A. | a certain amount of cash was owed to another party as of the acquisition date and was not part of assets acquired, |
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B. | certain amounts were not valid receivables as of the acquisition date, |
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C. | the realizable value of certain intangible assets should be changed, |
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D. | additional amounts were owed to several vendors as of the acquisition date, |
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E. | a tax liability owed to the China taxing authorities existed as of the acquisition date, and |
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F. | penalties were owed as of the acquisition date in relation to a lawsuit settled prior to the acquisition date for which all other amounts had been accrued or paid prior to the acquisition date. |
The recorded goodwill primarily results from the synergies we expect to realize from the combination of the entities and the assembled workforce we acquired in connection with the CBG Acquisition.
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| Revenue category | 7Amount |
| Transaction services | $ | 13,852 |
| Data platform services | 1,183 |
| Advertising and other | 1,689 |
| Revenue | $ | 16,724 |
Significant Judgments
When accounting for revenue in accordance with ASC 606, we make certain judgments, such as whether we act as a principal or as an agent in transactions or whether our contracts with customers fall within the scope of ASC 606, that affect the determination of the amount and timing of our revenue from contracts with customers. Based on the current facts and circumstances related to our contracts with customers, none of the judgments we make involve an elevated degree of qualitative significance or complexity such that further disclosure is warranted in terms of their potential impact on the amount and timing of our revenue.
Contract Assets and Contract Liabilities
We do not currently generate material contract assets. Other than changes resulting from routine business activity, the balance of our Contract liability did not change significantly during the three months ended March 31, 2018. We recognized revenue of $2.9 million during the three months ended March 31, 2018, which was included in the beginning balance of Contract liability at January 1, 2018.
NOTE 4. FAIR VALUE MEASUREMENTS
Liabilities Related to Warrants to Purchase Common Stock
At the end of each reporting period, we use the Monte Carlo Simulation model to estimate and report the fair value of liabilities related to certain outstanding warrants to purchase our common stock that are subject to potential anti-dilution adjustments or that contain put options or call options. Our outstanding liability-classified warrants include the warrants we issued in connection withor that we are obligated to issue as part of the consideration for our acquisition of allassets of the outstanding equity interests in Vegas.com, LLCChina Branding Group Limited (“Vegas.com”CBG”) in September 20152016 (the “VDC Acquisition”) and the financing related thereto (referred to herein as the VDC“CBG Acquisition Warrants and the VDC Financing Warrants, respectively), the CBG Acquisition WarrantsWarrants”) and warrants we issued in connection withas a result of an amendment to the Financing AmendmentAgreement related to the acquisition (the “CBG Financing Warrants”).
The following table presents the quantitative inputs, which we classify in Level 3 of the fair value hierarchy, used in estimating the fair value of the warrants:
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| | September 30, 2017 | | December 31, 2016 |
| | VDC | | CBG | | VDC | | CBG |
| Financing Warrants | | | | | | | |
| Expected volatility | 50.00 | % | | 50.00 | % | | 50.00 | % | | 50.00 | % |
| Risk-free interest rate | 1.62 | % | | 1.62 | % | | 1.64 | % | | 1.64 | % |
| Expected remaining term (years) | 2.98 |
| | 2.98 |
| | 3.73 |
| | 3.73 |
|
| Acquisition Warrants | | | | | | | |
| Expected volatility | 50.00 | % | | 50.00 | % | | 50.00 | % | | 50.00 | % |
| Risk-free interest rate | 1.62 | % | | 2.04 | % | | 1.64 | % | | 2.21 | % |
| Expected remaining term (years) | 2.98 |
| | 5.97 |
| | 3.73 |
| | 6.72 |
|
| | | | | | | | | | | |
| | | |
| | | |
| March 31, 2018 | | December 31, 2017 |
| CBG Financing Warrants | | | |
| Expected volatility | 60.00 | % | | 60.00 | % |
| Risk-free interest rate | 2.33 | % | | 1.96 | % |
| Expected remaining term (years) | 2.48 | | 2.73 |
| CBG Acquisition Warrants | | | |
| Expected volatility | 60.00 | % | | 60.00 | % |
| Risk-free interest rate | 2.59 | % | | 2.25 | % |
| Expected remaining term (years) | 5.47 | | 5.72 |
In addition to the quantitative assumptions above, we also consider whether we would issue additional equity and, if so, the price per share of such equity. At September 30, 2017,March 31, 2018, we estimated that threetwo future equity financing events would potentially occur within the subsequent twelve months.
Our estimate of expected volatility and our stock price tend to have the most significant impact on the estimated fair value of the VDC and CBG Financing Warrants and the VDC and CBG Acquisition Warrants. If we added or subtracted five percentage points with regard to our estimate of expected volatility, or if our stock price increased or decreased by five percent, our estimates of fair value would change approximately as follows (in thousands):
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| | | | | | | |
| Change in volatility | Increase | | Decrease |
| CBG Financing Warrants | $ | 375 |
| | $ | 435 |
|
| VDC Financing Warrants | 390 |
| | 360 |
|
| CBG Acquisition Warrants | 980 |
| | 980 |
|
| VDC Acquisition Warrants | 515 |
| | 600 |
|
| | | | |
| Change in stock price | | | |
| CBG Financing Warrants | $ | 290 |
| | $ | 320 |
|
| VDC Financing Warrants | 240 |
| | 180 |
|
| CBG Acquisition Warrants | 460 |
| | 460 |
|
| VDC Acquisition Warrants | 260 |
| | 260 |
|
| | | | | | | | | | | |
| Change in volatility | Increase | | Decrease |
| CBG Financing Warrants | $ | 385 | | $ | 505 |
| CBG Acquisition Warrants | 1,265 | | 1,265 |
| | | |
| Change in stock price | | | |
| CBG Financing Warrants | $ | 565 | | $ | 650 |
| CBG Acquisition Warrants | 1,095 | | 805 |
The following table presents the reconciliation ofchange in the beginning and ending balances of the liabilitiesliability balance associated with the VDC and CBG Acquisition Warrants and the VDC and CBG Financing Warrants that remain outstandingour liability-classified warrants (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, 2018 | | Year Ended December 31, 2017 |
| Balance at beginning of period | $ | 89,169 | | $ | 25,030 |
| | | |
| Warrant exercises | (59,907) | | — |
| Increase (decrease) in fair value | (8,610) | | 64,139 |
| Balance at end of period | $ | 20,652 | | $ | 89,169 |
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| | | | | | | |
| | Nine Months Ended September 30, | | Year Ended December 31, |
| | 2017 | | 2016 |
| Balance at beginning of period | $ | 25,030 |
| | $ | 19,195 |
|
| New warrant issuances | — |
| | 11,625 |
|
| Increase (decrease) in fair value | (2,351 | ) | | (5,790 | ) |
| Balance at end of period | $ | 22,679 |
| | $ | 25,030 |
|
| | | | |
At September 30, 2017, the priceJanuary 1, 2018, our outstanding liability-classified warrants included warrants we issued in connection with our acquisition of our common stock was less than the exercise priceall of the outstanding equity interests in Vegas.com, LLC in September 2015 (the "VDC Acquisition") and the financing related thereto (the "VDC Acquisition Warrants" and the "VDC Financing Warrants", respectively). On January 8, 2018, holders of VDC Acquisition Warrants effectively precluding exercise of the warrants. However, each holder has the rightwith respect to sell its VDC Acquisition Warrant back to us on its expiration date in exchange for2,416,996 shares of our common stock having a value equivalent to the value ofexercised such warrants. Because the VDC Acquisition Warrant at closingWarrants provided that such warrants were exercisable on a cashless basis only, we issued a total of 750,102 shares of common stock in settlement of such warrants without receiving any proceeds from the exercise thereof.
On January 10, 2018, we exercised our right to exercise all remaining VDC Acquisition (reduced pro rata based on the percentage of theWarrants and VDC Acquisition Warrant exercised), provided that this put option terminates ifFinancing Warrants (which right became effective when the closing price of our common stock equals or exceeds $10.16 for any 20 trading days duringreached $14.00), exercising VDC Acquisition Warrants with respect to 6,184,414 shares of our common stock and VDC Financing Warrants with respect to 3,117,148 shares of our common stock. Because the VDC Acquisition Warrants and VDC Financing Warrants provided that such warrants were exercisable on a periodcashless basis only, we issued a total of 30 consecutive trading days at any time on or prior2,236,915 and 1,385,396 shares of common stock to the expiration date. If the holders had exercised the put option as if September 30, 2017 was the expiration date of the VDC Acquisition Warrants we would have issued toand the holders 2,610,967 shares with a fair valueVDC Financing Warrants, respectively, in settlement of $3.77 per share. The number of shares issuable uponsuch warrants without receiving any proceeds from the exercise of the put option is calculated based on the volume weighted average price of our common stock during the 30 trading days ending on the warrants’ expiration date (“30-day VWAP”); the more that the 30-day VWAP decreases, the number of shares we would issue to the holders increases significantly.thereof.
Contingent Consideration Issued in Business Acquisition
We used the discounted cash flow valuation technique to estimate the fair value of the liability related to certain cash payments stipulated in the VDC Acquisition that were contingent upon the performance of Vegas.com in the years ended December 31, 2016 and 2017, and are contingent upon the performance of Vegas.com in the year ended December 31, 2016, and in the years ending December 31, 2017 and 2018 (the “Earnout Payments”). The significant unobservable inputs that we used, which we classify in Level 3 of the fair value hierarchy, were projected earnings before interest, taxes, depreciation and amortization (“EBITDA”), the probability of achieving certain amounts of EBITDA, and the rate used to discount the liability.
The following table presents the change during the ninethree months ended September 30, 2017March 31, 2018 in the balance of the liability associated with the Earnout Payments (in thousands):
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| | | |
| Balance at beginning of period | $ | 2,860 |
|
| Change in fair value of contingent consideration | 50 |
|
| Balance at end of period | $ | 2,910 |
|
| | | | | |
| Balance at beginning of period | $ | 1,930 |
| Change in fair value of contingent consideration (included in Other loss) | 30 |
| Balance at end of period | $ | 1,960 |
On the Condensed Consolidated Balance Sheet, we included the current portion of the liability for contingent consideration as a component of Accrued expense and other liabilities, and the long-term portion as a component of Other liabilities (see Note 1112). We have not yet paid the portion of the Earnout Payments which was due on April 30, 2017.
NOTE 5. RESTRICTED CASH
Regarding our restricted cash, $2.25 million relates to the Financing Agreement and secures our obligations under that agreement. The restriction on the cash related to the Financing Agreement will not be released until we have repaid all of our obligations under the Financing Agreement, unless we obtain the written authorization of the Lenders. The remaining amount of our restricted cash relates to the Letter of Credit Facility Agreement we have in place to satisfy the requirements of several of the vendors for whom we sell products (hotel rooms, air travel, show tickets, et cetera) through our online outlets. By contract, certain vendors require letters of credit as a means of securing our payment to them of amounts related to the sales we make on their behalf. We renew the letter of credit facility annually in May, and the restrictions on the cash related to the letters of credit will remain to the extent we continue to enter into contracts requiring the security of letters of credit.
The following table provides a reconciliation of the amounts separately reported as Cash and cash equivalents and Restricted cash on our consolidated balance sheets with the single line item reported on our consolidated statements of cash flows as Cash, cash equivalents and restricted cash (in thousands):
| | | | | | | | | | | |
| | | |
| | | |
| March 31, 2018 | | December 31, 2017 |
| Cash and cash equivalents | $ | 21,851 | | $ | 22,632 |
| Restricted cash reported in current assets | 9,409 | | 11,670 |
| Restricted cash reported in long-term assets | 2,250 | | — |
| Total cash, cash equivalents and restricted cash | $ | 33,510 | | $ | 34,302 |
|
| | | | | | | |
| | September 30,
2017 | | December 31, 2016 |
| Cash and cash equivalents | $ | 15,970 |
| | $ | 6,893 |
|
| Restricted cash reported in current assets | 11,670 |
| | 9,405 |
|
| Restricted cash reported in long-term assets | — |
| | 2,250 |
|
| Total cash, cash equivalents and restricted cash | $ | 27,640 |
| | $ | 18,548 |
|
NOTE 6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
In 2009, we co-founded a U.S.-based venture, Sharecare, to build a web-based platform that simplifies the search for health and wellness information. The other co-founders of Sharecare were Dr. Mehmet Oz, HARPO Productions, Discovery Communications, Jeff Arnold and Sony Pictures Television. As of September 30, 2017,March 31, 2018, we owned approximately five percent of Sharecare’s issued stock and maintained representation on its Board of Directors.
NOTE 7. PREPAID EXPENSE AND OTHER CURRENT ASSETS
The following table presents the components of prepaid expense and other current assets (in thousands):
| | | | | | | | | | | |
| | | |
| | | |
| March 31, 2018 | | December 31, 2017 |
| Prepaid expense | $ | 2,755 | | $ | 2,036 |
| Deposits | 2,084 | | 1,960 |
| Inventory, net | 330 | | 234 |
| Other current assets | 948 | | 1,288 |
| Total | $ | 6,117 | | $ | 5,518 |
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Prepaid expense | $ | 3,062 |
| | $ | 2,160 |
|
| Deposits | 596 |
| | 137 |
|
| Inventory, net | 319 |
| | 314 |
|
| Other current assets | 851 |
| | 712 |
|
| Total | $ | 4,828 |
| | $ | 3,323 |
|
| | | | |
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands, except estimated lives):
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| Estimated Life (Years) | | March 31, 2018 | | December 31, 2017 |
| Vehicles | 5 | | $ | 1,108 | | $ | 447 |
| Computers and equipment | 2 - 12 | | 1,819 | | 1,635 |
| Furniture and fixtures | 2 - 9 | | 218 | | 220 |
| Software | 3 - 5 | | 21,118 | | 20,773 |
| Software development in progress | | | 2,076 | | 1,935 |
| Leasehold improvements | 1 - 10 | | 501 | | 328 |
| Total property, equipment and software | | | $ | 26,840 | | $ | 25,338 |
| Less accumulated depreciation | | | (13,417) | | (11,951) |
| Total property, equipment and software, net | | | $ | 13,423 | | $ | 13,387 |
|
| | | | | | | | | |
| | Estimated Life (Years) | | September 30,
2017 | | December 31, 2016 |
| Vehicles | 5 | | $ | 224 |
| | $ | 150 |
|
| Computers and equipment | 2 - 12 | | 1,590 |
| | 1,192 |
|
| Furniture and fixtures | 2 - 9 | | 254 |
| | 244 |
|
| Software | 3 - 5 | | 20,609 |
| | 19,538 |
|
| Software development in progress | | | 1,661 |
| | 839 |
|
| Leasehold improvements | 1 | | 325 |
| | 166 |
|
| Total property, equipment and software | | | $ | 24,663 |
| | $ | 22,129 |
|
| Less accumulated depreciation | | | (10,627 | ) | | (6,598 | ) |
| Total property, equipment and software, net | | | $ | 14,036 |
| | $ | 15,531 |
|
For the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, depreciation (and amortization of software) expense was $4.1$1.4 million and $3.5$1.3 million, respectively.
NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes intangible assets by category (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
| Finite-lived intangible assets | | | | | | | | | | | |
| Domain names | $ | 2,551 | | $ | (1,678) | | $ | 873 | | $ | 2,591 | | $ | (1,663) | | $ | 928 |
| Customer relationships | 23,186 | | (11,317) | | 11,869 | | 23,486 | | (10,539) | | 12,947 |
| Media content and broadcast rights | 2,485 | | (1,061) | | 1,424 | | 2,485 | | (936) | | 1,549 |
| Acquired technology | 578 | | (483) | | 95 | | 578 | | (461) | | 117 |
| Other intangible assets | 68 | | (68) | | — | | 68 | | (68) | | — |
| $ | 28,868 | | $ | (14,607) | | $ | 14,261 | | $ | 29,208 | | $ | (13,667) | | $ | 15,541 |
| Indefinite-lived intangible assets | | | | | | | | | | | |
| Trademarks and trade names | $ | 8,276 | | | | $ | 8,276 | | $ | 8,276 | | | | $ | 8,276 |
| License to operate in China | 130 | | | | 130 | | 129 | | | | 129 |
| Total intangible assets | $ | 37,274 | | | | $ | 22,667 | | $ | 37,613 | | | | $ | 23,946 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Gross Amount | | Accumulated
Amortization | | Net Amount | | Gross Amount | | Accumulated
Amortization | | Net Amount |
| Finite-lived intangible assets | | | | | | | | | | | |
| Domain names | $ | 2,591 |
| | $ | (1,748 | ) | | $ | 843 |
| | $ | 3,041 |
| | $ | (1,554 | ) | | $ | 1,487 |
|
| Customer relationships | 25,770 |
| | (9,493 | ) | | 16,277 |
| | 27,064 |
| | (6,513 | ) | | 20,551 |
|
| Media content and broadcast rights | 3,006 |
| | (885 | ) | | 2,121 |
| | 3,491 |
| | (541 | ) | | 2,950 |
|
| Acquired technology | 578 |
| | (440 | ) | | 138 |
| | 578 |
| | (268 | ) | | 310 |
|
| Other intangible assets | 68 |
| | (68 | ) | | — |
| | 68 |
| | (61 | ) | | 7 |
|
| | $ | 32,013 |
| | $ | (12,634 | ) | | $ | 19,379 |
| | $ | 34,242 |
| | $ | (8,937 | ) | | $ | 25,305 |
|
| Indefinite-lived intangible assets | | | | | | | | | | | |
| Trademarks and trade names | $ | 11,628 |
| | | | $ | 11,628 |
| | $ | 12,001 |
| | | | $ | 12,001 |
|
| License to operate in China | 128 |
| |
| | 128 |
| | 100 |
| |
| | 100 |
|
| Total intangible assets | $ | 43,769 |
| |
| | $ | 31,135 |
| | $ | 46,343 |
| |
| | $ | 37,406 |
|
Total amortization expense was $4.1$1.3 million and $2.6$1.5 million for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively.
The following table summarizes the changes in goodwill during the ninethree months ended September 30, 2017March 31, 2018 and the year ended December 31, 20162017 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 | | Year Ended December 31, 2017 |
| Travel & Entertainment Segment | | Corporate Entity and Other Business Units | | Total | | Travel & Entertainment Segment | | Corporate Entity and Other Business Units | | Total |
| Balance at beginning of period | $ | 18,514 | | $ | 1,585 | | $ | 20,099 | | $ | 18,514 | | $ | 8,249 | | $ | 26,763 |
| Business acquisitions | — | | — | | — | | — | | 2,116 | | 2,116 |
| Impairment of goodwill | — | | — | | — | | — | | (8,796) | | (8,796) |
| Other | — | | 11 | | 11 | | — | | 16 | | 16 |
| Balance at end of period | $ | 18,514 | | $ | 1,596 | | $ | 20,110 | | $ | 18,514 | | $ | 1,585 | | $ | 20,099 |
NOTE 10. INCOME TAX
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 | | Year Ended December 31, 2016 |
| | Travel and Entertainment Segment | | Corporate Entity and Other Business Units | | Total | | Travel and Entertainment Segment | | Corporate Entity and Other Business Units | | Total |
| Balance at beginning of period | $ | 18,514 |
| | $ | 8,249 |
| | $ | 26,763 |
| | $ | 18,514 |
| | $ | 1,823 |
| | $ | 20,337 |
|
| Business acquisitions | — |
| | 2,116 |
| | 2,116 |
| | — |
| | 6,426 |
| | 6,426 |
|
| Other | — |
| | 10 |
| | 10 |
| | — |
| | — |
| | — |
|
| Balance at end of period | $ | 18,514 |
| | $ | 10,375 |
| | $ | 28,889 |
| | $ | 18,514 |
| | $ | 8,249 |
| | $ | 26,763 |
|
Our effective tax rate (“ETR”) from continuing operations was (0.22)% for the quarter ended March 31, 2018, due to indefinite-lived intangible assets and the effects of valuation allowances in various jurisdictions. The quarterly ETR has not significantly differed from our historical annual ETR.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), which makes broad and complex changes to the U.S. tax code that will affect the 2018 tax year.
We have not completed our accounting for the Tax Act. As noted in our 2017 Form 10-K:
| | | | | | | | |
| | |
| We were able to reasonably estimate certain effects and, therefore, recorded provisional adjustments associated with the impact on deferred tax assets and deferred tax liabilities from reduction of Contentsthe U.S. federal corporate tax rate. | 12 |
| | |
| — | We were not yet able to reasonably estimate the effects for global intangible low-taxed income (GILTI) and deemed repatriation taxes. Therefore, no provisional adjustments were recorded. | |
NOTE 10.11. DEBT
Short-Term Debt
On April 12, 2017, we issued a short-term note payable in the principal amount of $3.0 million to a private lender in exchange for cash in the same amount. The agreement, which does not have a stated interest rate, required us to repay the note plus a fee of $115,000$115 thousand on the maturity date of June 30, 2017. The note is accruing interest at $500 per day on the unpaid principal until we repay the note in full.
Long-Term Debt
The following table presents long-term debt (in thousands) as of September 30, 2017 (in thousands):
| | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| Loan due September 2020 | $ | 35,500 | | $ | 35,500 |
| Unamortized discount | (560) | | (836) |
| Unamortized debt issuance cost | (32) | | (79) |
| Carrying value of Loan | 34,908 | | 34,585 |
| Exit fee payable in relation to Loan | 3,500 | | 3,500 |
| | | |
| Total long-term debt | $ | 38,408 | | $ | 38,085 |
| Less: current portion | (11,500) | | (38,085) |
| Long-term debt, less current portion and net of debt issuance cost | $ | 26,908 | | $ | — |
| | | |
| | | |
| | | |
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Loan due September 2018 | $ | 35,500 |
| | $ | 35,500 |
|
| Unamortized debt issuance cost | (104 | ) | | (175 | ) |
| Carrying value of Loan | 35,396 |
| | 35,325 |
|
| Exit fee payable in relation to Loan | 2,500 |
| | 2,500 |
|
| Convertible promissory note payable to an accredited investor | — |
| | 100 |
|
| Total long-term debt | $ | 37,896 |
| | $ | 37,925 |
|
| Less: current portion | (37,896 | ) | | (100 | ) |
| Long-term debt, less current portion and net of debt issuance cost | $ | — |
| | $ | 37,825 |
|
On September 24, 2015, we entered into the Financing Agreement, pursuant to which the Lenders provided us with the $27.5 million Loan. As mentioned in Note 1, weWe entered into theAmendment No. 1 to Financing AmendmentAgreement on September 20, 2016 which, among other changes, increased the Loan by $8.0 million to a total aggregate principal amount of $35.5 million. TheAs of March 31, 2018, the Loan bearsbore interest at three-month LIBOR (with a floor of 1%) plus 10% per annum, payable monthly, and hashad a maturity date of September 24, 2018. As of September 30, 2017,March 31, 2018, the applicable interest rate on the Loan was approximately 11%12% per annum. Changes to the terms of the Financing Agreement made after the end of the period covered by this report are described in Note 16.
In connection with the Financing Agreement, we also entered into a security agreement dated as of September 24, 2015 (the “Security Agreement”) with the other Borrowers and the Guarantors for the benefit of MGG, as collateral agent for the Secured Parties referred to therein, to secure the obligations of the Borrowers and the Guarantors under the Financing Agreement. The Security Agreement provides for a first-priority lien on, and security interest in, all assets of Remark and our subsidiaries, subject to certain exceptions.
On October 25, 2017, we entered into Amendment No. 2 and Waiver and Consent to Financing Agreement, pursuant to which the Lenders waived specified events of default under the Financing Agreement occurring prior to January 1, 2018, including but not limited to events of default resulting from our non-compliance with covenants requiring minimum consolidated EBITDA of Remark and its subsidiaries and value of our assets. The Lenders also waived the covenant related to restricted cash balance through September 19, 2017.
On December 5, 2017, we entered into Amendment No. 3 to Financing Agreement pursuant to which the Lenders agreed, among other things, to modify certain of our covenants under the Financing Agreement, including (i) replacing the covenant regarding consolidated EBITDA of Remark and our subsidiaries with a covenant regarding consolidated gross revenue of our subsidiaries engaged in the operation of our KanKan business, (ii) modifying the covenants regarding consolidated EBITDA of Vegas.com and its subsidiaries and the value of certain of our assets, and (iii) increasing the amount we are permitted to invest in our non-U.S. subsidiaries operating our KanKan business, subject to certain conditions.
The Financing Agreement,
as amended, and the Security Agreement contain representations, warranties, affirmative and negative covenants (including financial covenants with respect to quarterly EBITDA levels
of Vegas.com, quarterly revenue generated by KanKan and the value of our assets), events of default, indemnifications and other provisions customary for financings of this type. The occurrence of any event of default under the Financing Agreement may result in the Loan amount outstanding and unpaid interest thereon, becoming immediately due and payable.
As of September 30, 2017, we were not in compliance with the covenant under the Financing Agreement requiring minimum consolidated EBITDA of Remark and its subsidiaries for the trailing twelve-month period ended September 30, 2017 of $(1.5) million, as our actual consolidated EBITDA for such period was $(4.4) million. As explained in Note 15, the Lenders waived specified events of default under the Financing Agreement, including with respect to (i) minimum consolidated EBITDA of Remark and its subsidiaries for the trailing twelve-month periods ended June 30, 2017 and September 30, 2017, (ii) minimum value of certain of our assets for the fiscal quarters ended June 30, 2017 and September 30, 2017, and (iii) minimum restricted cash balance through September 19, 2017.
NOTE 11.12. OTHER LIABILITIES
The following table presents the components of other liabilities (in thousands):
| | | | | | | | | | | |
| | | |
| | | |
| March 31, 2018 | | December 31, 2017 |
| | | |
| | | |
| Deferred rent | $ | 1,786 | | $ | 1,820 |
| Early lease termination liability | 1,444 | | — |
| Contingent consideration liability, net of current portion | 960 | | 940 |
| | | |
| Deferred tax liability, net | 808 | | 741 |
| Other | 35 | | — |
| Total | $ | 5,033 | | $ | 3,501 |
During the first quarter of 2018, we determined that we would no longer use certain leased office space and, as a result, we sublet the majority of such office space to third parties. As a result of our decision, we recognized $2.3 million of unallocated rent expense in the corporate entity, and an associated liability for early lease termination. The current portion of the liability is recorded in Accrued expense and other current liabilities, with the long-term portion recorded in Other liabilities (see table above).
The following table presents the change in the liability balance related to the early lease termination (in thousands):
| | | | | |
| Three Months Ended March 31, 2018 |
| Balance at beginning of period | $ | — |
| Establishment of early lease termination liability | 2,295 |
| Payment of rent and other costs | (132) |
| Receipt of amounts due under subleases | 9 |
| Other | 1 |
| Balance at end of period | $ | 2,173 |
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Contingent consideration liability, net of current portion | $ | 930 |
| | $ | 1,840 |
|
| Deferred rent | 1,884 |
| | 1,002 |
|
| Deferred tax liability, net | 1,352 |
| | 749 |
|
| Total | $ | 4,166 |
| | $ | 3,591 |
|
| | | | |
NOTE 12.13. COMMITMENTS AND CONTINGENCIES
We are neither a defendant in any material pending legal proceeding nor are we aware of any material threatened claims against us; therefore, we have not accrued any contingent liabilities, exclusive of the liability for the Earnout Payments related to the VDC Acquisition.
NOTE 13.14. STOCKHOLDERS' EQUITY AND NET LOSS PER SHARE
Equity Issuances
During the ninethree months ended September 30,March 31, 2017, we issued a total of 3,052,897382,308 shares of our common stock to private investors in exchange for approximately $8.3$1.3 million in cash. We did not make similar issuances of our common stock during the three months ended March 31, 2018.
Stock-Based Compensation
We are authorized to issue equity-based awards under our 2010 Equity Incentive Plan, our 2014 Incentive Plan, and our 20142017 Incentive Plan, each of which our stockholders have approved. We also award cash bonuses ("China Cash Bonuses") to our employees in China, which grants are not subject to a formal incentive plan and which can only be settled in cash. We grant such awards to attract, retain and motivate eligible officers, directors, employees and consultants. Under each of the plans, we have granted shares of restricted stock and options to purchase common stock to our officers and employees with exercise prices equal to or greater than the fair value of the underlying shares on the grant date.
Stock options awardedand China Cash Bonuses generally expire 10 years from the grant date. All forms of equity awards vest upon the passage of time, the attainment of performance criteria, or both. When participants exercise stock options, we issue any shares of our common stock resulting from such exercise from new authorized and unallocated shares available at the time of exercise.
The following table summarizes the stock option activity under our equity incentive plans related to equity-classified stock option grants as of September 30, 2017,March 31, 2018, and changes during the ninethree months then ended:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at January 1, 2018 | 9,397,056 | | $ | 3.80 | | | | |
| Granted | 1,385,000 | | 7.78 | | | | |
| Exercised | (63,960) | | 4.43 | | | | |
| Forfeited, cancelled or expired | (28,263) | | 4.59 | | | | |
| Outstanding at March 31, 2018 | 10,689,833 | | $ | 4.31 | | 8.2 | | $ | 18,254 |
| Options exercisable at March 31, 2018 | 9,530,389 | | $ | 4.52 | | 8.1 | | $ | 14,469 |
|
| | | | | | | | | | | | |
| | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at January 1, 2017 | 7,344,140 |
| | $ | 5.01 |
| | | | |
| Granted | 2,927,000 |
| | 2.07 |
| | | | |
| Exercised | (2,500 | ) | | 1.99 |
| | | | |
| Forfeited, cancelled or expired | (270,337 | ) | | 4.46 |
| | | | |
| Outstanding at September 30, 2017 | 9,998,303 |
| | $ | 4.16 |
| | 8.3 | | $ | 4,974 |
|
| Options exercisable at September 30, 2017 | 7,954,236 |
| | $ | 4.60 |
| | 7.9 | | $ | 2,098 |
|
We granted an option to purchase 1.3 million shares of our common stock at an exercise price of $7.81per share to Kai-Shing Tao, our Chief Executive Officer and Chairman of the Board, under the 2017 Incentive Plan, which our stockholders approved in January 2018. We recorded the entire $11.6 million of compensation expense associated with this award during the three months ended March 31, 2018 because Mr. Tao fully vested in the award at the time we received stockholder approval.
During the three months ended September 30, 2017,March 31, 2018, we issued aneither awarded restricted stock award of 18,588 sharesunder our equity incentive plans nor did we engage in any significant activity with a grant-date fair value of less than $0.1 million. The award vested immediately upon grant.regard to our China Cash Bonuses.
We incurred share-based compensation expense of $1.6$11.6 million and $0.6$0.3 million, respectively, during the three months ended September 30, 2017March 31, 2018 and 2016, and of $2.2 million and $3.0 million, respectively, during the nine months ended September 30, 2017 and 2016.2017.
Net Income (Loss) per Share
For the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, there were no reconciling items related to either the numerator or denominator of the loss per share calculation.
Securities which would have been anti-dilutive to a calculation of diluted earnings per share include:
| | | | | | | | |
| | |
| — | the outstanding stock options described above; | |
| | |
| — | the outstanding CBG Acquisition Warrant, which may be exercised to purchase 40,000 shares of our common stock at a per-share exercise price of $10.00 (we are also committed to the future issuance of additional CBG Acquisition Warrants at the same per-share exercise price as the CBG Acquisition Warrant that has already been issued), and the outstanding CBG Financing Warrants, which may be exercised to purchase 2,961,774 shares of our common stock at an exercise price of $4.96 per share; | |
| | |
| — | the warrants issued in conjunction with our acquisition of Hotelmobi, Inc., which may be exercised to purchase 1,000,000 shares of our common stock, half at an exercise price of $8.00 per share and half at an exercise price of $12.00 per share. | |
| | |
the outstanding stock options described above;
the outstanding CBG Acquisition Warrant, which may be exercised to purchase 40,000 shares of our common stock at a per-share exercise price of $10.00 (we are also committed to the future issuance of additional CBG Acquisition Warrants at the same per-share exercise price as the CBG Acquisition Warrant that has already been issued), and the outstanding CBG Financing Warrants, which may be exercised to purchase 2,892,731 shares of our common stock at an exercise price of $5.08 per share;
the outstanding VDC Acquisition Warrants, which may be exercised to purchase 8,601,410 shares of our common stock at an exercise price of $9.00 per share, and the outstanding VDC Financing Warrants, which may be exercised to purchase 2,998,872 shares of our common stock at an exercise price of $7.74 per share; and
the warrants issued in conjunction with our acquisition of Hotelmobi, Inc., which may be exercised to purchase 1,000,000 shares of our common stock, half at an exercise price of $8.00 per share and half at an exercise price of $12.00 per share.
NOTE 14.15. SEGMENT INFORMATION
InWe currently report on two segments: our Travel & Entertainment segment, which provides our customers with access to a full range of travel and entertainment services in Las Vegas and surrounding areas, and our Technology & Data Intelligence segment, which provides services to our customers based upon the presentation ofdata collected and processed by our segment information, we include Adjusted EBITDA, which is a “non-GAAP financial measure” as defined in Item 10(e) of Regulation S-K promulgated by the Securities and Exchange Commission (“SEC”). Weproprietary data intelligence software.
Our chief operating decision makers use Adjusted EBITDA as a supplement to operating income (loss), the most comparable GAAP financialprimary measure to evaluateof profitability for evaluating the operational performance of our reportable segment.segments. Adjusted EBITDA represents operating income (loss) plus depreciation and amortization expense, share-based compensation expense, impairments and net other income, less other loss. You should not considerFor our presentation ofTravel & Entertainment segment, Adjusted EBITDA includes an allocation of rent expense, which allocation we base on usage of space. We do not allocate certain other types of shared expense, such as legal and accounting, to our reportable segments; such costs are included in isolation, or consider it superior to, or as a substitute for, financial information preparedCorporate Entity and presented in accordance with GAAP. You should also note that our calculation of Adjusted EBITDA may be different from the calculation of Adjusted EBITDA or similarly-titled non-GAAP financial measures used by other companies; therefore, our Adjusted EBITDA may not be comparable to such other measures.Other.
The following table presents certain financial information, including a disaggregation of revenue, regarding our travelbusiness segments and entertainment segmentother entities for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Travel & Entertainment | | Technology & Data Intelligence | | Corporate Entity and Other | | Consolidated |
| Three Months Ended March 31, 2018 | | | | | | | |
| | | | | | | |
| | | | | | | |
| Revenue | $ | 14,898 | | $ | 1,183 | | $ | 643 | | $ | 16,724 |
| | | | | | | |
| Adjusted EBITDA | $ | 167 | | $ | (1,518) | | $ | (5,552) | | $ | (6,903) |
| | | | | | | |
| Three Months Ended March 31, 2017 | | | | | | | |
| | | | | | | |
| | | | | | | |
| Revenue | $ | 14,193 | | $ | 131 | | $ | 975 | | $ | 15,299 |
| | | | | | | |
| Adjusted EBITDA | $ | 604 | | $ | (480) | | $ | (2,380) | | $ | (2,256) |
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| | Segment | | Corporate Entity and Other | | Consolidated |
| Three Months Ended September 30, 2017 | | | | | |
| GAAP financial measures: | | | | | |
| Net revenue | $ | 16,284 |
| | $ | 3,165 |
| | $ | 19,449 |
|
| Operating loss | $ | (200 | ) | | $ | (5,730 | ) | | $ | (5,930 | ) |
| Non-GAAP financial measure: | | | | | |
| Adjusted EBITDA | $ | 1,955 |
| | $ | (3,779 | ) | | $ | (1,824 | ) |
| | | | | | |
| Nine Months Ended September 30, 2017 | | | | | |
| GAAP financial measures: | | | | | |
| Net revenue | $ | 45,765 |
| | $ | 6,239 |
| | $ | 52,004 |
|
| Operating loss | $ | (1,977 | ) | | $ | (14,010 | ) | | $ | (15,987 | ) |
| Non-GAAP financial measure: | | | | | |
| Adjusted EBITDA | $ | 4,322 |
| | $ | (9,884 | ) | | $ | (5,562 | ) |
| | | | | | |
| Three Months Ended September 30, 2016 | | | | | |
| GAAP financial measures: | | | | | |
| Net revenue | $ | 14,891 |
| | $ | 251 |
| | $ | 15,142 |
|
| Operating loss | $ | (245 | ) | | $ | (3,953 | ) | | $ | (4,198 | ) |
| Non-GAAP financial measure: | | | | | |
| Adjusted EBITDA | $ | 1,788 |
| | $ | (2,881 | ) | | $ | (1,093 | ) |
| | | | | | |
| Nine Months Ended September 30, 2016 | | | | | |
| GAAP financial measures: | | | | | |
| Net revenue | $ | 42,668 |
| | $ | 1,703 |
| | $ | 44,371 |
|
| Operating loss | $ | (1,223 | ) | | $ | (11,654 | ) | | $ | (12,877 | ) |
| Non-GAAP financial measure: | | | | | |
| Adjusted EBITDA | $ | 4,851 |
| | $ | (7,390 | ) | | $ | (2,539 | ) |
| | | | | | |
The following table reconciles Adjusted EBITDA for the segment and for the corporate entity and other business units to Operating lossLoss before income taxes (in thousands):
|
| | | | | | | | | | | |
| | Segment | | Corporate Entity and Other | | Consolidated |
| Three Months Ended September 30, 2017 | | | | | |
| Adjusted EBITDA | $ | 1,955 |
| | $ | (3,779 | ) | | $ | (1,824 | ) |
| Less: | | | | | |
| Depreciation, amortization and impairments | (2,155 | ) | | (355 | ) | | (2,510 | ) |
| Share-based compensation expense | — |
| | (1,629 | ) | | (1,629 | ) |
| Other income, net | — |
| | — |
| | — |
|
| Plus: | | | | | |
| Other loss | — |
| | 33 |
| | 33 |
|
| Operating loss | $ | (200 | ) | | $ | (5,730 | ) | | $ | (5,930 | ) |
| | | | | | |
| Nine Months Ended September 30, 2017 | | | | | |
| Adjusted EBITDA | $ | 4,322 |
| | $ | (9,884 | ) | | $ | (5,562 | ) |
| Less: | | | | | |
| Depreciation, amortization and impairments | (6,280 | ) | | (1,985 | ) | | (8,265 | ) |
| Share-based compensation expense | — |
| | (2,225 | ) | | (2,225 | ) |
| Other income, net | (19 | ) | | (1 | ) | | (20 | ) |
| Plus: | | | | | |
| Other loss | — |
| | 85 |
| | 85 |
|
| Operating loss | $ | (1,977 | ) | | $ | (14,010 | ) | | $ | (15,987 | ) |
| | | | | | |
| Three Months Ended September 30, 2016 | | | | | |
| Adjusted EBITDA | $ | 1,788 |
| | $ | (2,881 | ) | | $ | (1,093 | ) |
| Less: | | | | | |
| Depreciation, amortization and impairments | (2,033 | ) | | (492 | ) | | (2,525 | ) |
| Share-based compensation expense | — |
| | (614 | ) | | (614 | ) |
| Other income, net | — |
| | 1 |
| | 1 |
|
| Plus: | | | | | |
| Other loss | — |
| | 33 |
| | 33 |
|
| Operating loss | $ | (245 | ) | | $ | (3,953 | ) | | $ | (4,198 | ) |
| | | | | | |
| Nine Months Ended September 30, 2016 | | | | | |
| Adjusted EBITDA | $ | 4,851 |
| | $ | (7,390 | ) | | $ | (2,539 | ) |
| Less: | | | | | |
| Depreciation, amortization and impairments | (6,045 | ) | | (1,356 | ) | | (7,401 | ) |
| Share-based compensation expense | — |
| | (3,012 | ) | | (3,012 | ) |
| Other income, net | (29 | ) | | — |
| | (29 | ) |
| Plus: | | | | | |
| Other loss | — |
| | 104 |
| | 104 |
|
| Operating loss | $ | (1,223 | ) | | $ | (11,654 | ) | | $ | (12,877 | ) |
| | | | | | |
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2018 | | 2017 | | |
| Adjusted EBITDA | $ | (6,903) | | $ | (2,256) | | |
| Less: | | | | | |
| Depreciation and amortization | (2,718) | | (2,861) | | |
| Impairments | — | | — | | |
| Share-based compensation expense | (11,605) | | (275) | | |
| Other income, net | (11) | | (19) | | |
| Plus: | | | | | |
| Other loss | 31 | | 31 | | |
| Operating loss | $ | (21,206) | | $ | (5,380) | | |
| Other income (expense) | | | | | |
| Interest expense | (1,406) | | (1,018) | | |
| Other income (loss), net | 11 | | 19 | | |
| Change in fair value of warrant liability | 8,610 | | 6,569 | | |
| Other loss | (31) | | (31) | | |
| Total other income, net | $ | 7,184 | | $ | 5,539 | | |
| Loss before income taxes | $ | (14,022) | | $ | 159 | | |
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The following table presents total assets for our travelsegments and entertainment segmentthe corporate and other entities (in thousands):
|
| | | | | | | |
| | September 30,
2017 | | December 31, 2016 |
| Travel and entertainment segment | $ | 77,372 |
| | $ | 76,074 |
|
| Corporate entity and other business units | 32,374 |
| | 29,625 |
|
| Consolidated | $ | 109,746 |
| | $ | 105,699 |
|
| | | | |
| | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| Travel & Entertainment segment | $ | 80,298 | | $ | 75,820 |
| Technology & Data Intelligence segment | 4,778 | | 5,105 |
| Corporate entity and other business units | 17,730 | | 22,612 |
| Consolidated | $ | 102,806 | | $ | 103,537 |
Capital expenditures for our travel and entertainmentTravel & Entertainment segment totaled $0.7$1.0 million and $0.5$0.4 million during the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively, and $1.6 million and $1.2while capital expenditures for our Technology & Data Intelligence segment totaled $0.4 million during each of the nine months ended September 30, 2017 and 2016,same periods, respectively.
NOTE 15.16. SUBSEQUENT EVENTS
Sale of Assets
On October 24, 2017, we and Intersearch Tax Solutions, Inc. (“ITS”) entered into a quitclaim agreement (the “ITS Agreement”) under which we sold certain domain names and related rights and property to ITS. Pursuant to the ITS Agreement, in exchange for the assets we sold to ITS, we received $122,500 in cash, $200,000 in the form of a promissory note (the “ITS Note”), 25% of the amount of tax-extension related revenue generated by hyperlinks on our IRS.com website that link to the domain names ITS purchased from us, and 35% of the amount of gross profit in excess of $300,000 generated by any of the properties ITS purchased from us.
The ITS Note will accrue interest at a rate of 5% per annum, compounded annually, with $100,000 principal plus related accrued and unpaid interest due and payable on each of April 30, 2018, and April 30, 2019.
Because of our advance negotiations with ITS as of September 30, 2017 and our expectation that we would likely complete the sale of assets to ITS within a very short time subsequent to September 30, 2017, we classified the assets we sold to ITS as Assets held for sale in the balance sheet. We do not expect to record a material gain or loss on the sale.
Amendment, Waiver and Consent Related to Financing Agreement
On October 25, 2017, we entered into Amendment No. 24 and Waiver and Consent to Financing Agreement, dated as of October 25, 2017the same date (the “Second"Fourth Financing Amendment”Amendment"), to amend ourthe Financing Agreement. The Fourth Financing Amendment provided for, among other things, (i) a reduction in the interest rate on the remaining amount outstanding under the Financing Agreement with MGG. Pursuant to three-month LIBOR plus 8.5% per annum, (ii) an extension of the Secondmaturity date under the Financing Amendment,Agreement to September 30, 2020, (iii) a modification of certain of our covenants under the Financing Agreement, including covenants regarding capital expenditures, minimum value of certain of our assets, consolidated EBITDA of Vegas.com and its subsidiaries, and revenue generated by KanKan (iv) an increase in the amount we are permitted to invest in our non-U.S. subsidiaries operating our KanKan business (v) a waiver by the Lenders waived specifiedof certain events of default under the Financing Agreement occurring prior to January 1, 2018, including with respect to (i) minimum consolidated EBITDAand (vi) prepayment by the Borrowers of Remark$8.0 million principal amount outstanding and its subsidiaries for$3.5 million of exit fees under the trailing twelve-month periods ended June 30, 2017 and September 30, 2017, (ii) minimum valueFinancing Agreement within 60 days following the date of certain of our assets for the fiscal quarters ended June 30, 2017 and September 30, 2017, and (iii) minimum restricted cash balance through September 19, 2017.Fourth Financing Amendment. In consideration for the Lenders’ entry into the SecondFourth Financing Amendment, and pursuant to the termswe also paid a closing fee of the Financing Agreement, among other things, we agreed to increase the exit fee payable to the Lenders upon termination of the Financing Agreement by $750,000, and to reimburse the Lenders for fees, costs and expenses related to the Second Financing Amendment.approximately $413 thousand.
Stock Issuance
On October 30, 2017, pursuant to the Aspire Purchase Agreement, we issued 1,639,583 shares of our common stock to Aspire Capital in exchange for $5.3 million in cash. Except for an amount equal to the par value of the shares issued, we will record the proceeds in additional paid-in capital.
| |
ITEM 2. | ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OF OPERATIONS
You should read our discussion and analysis of our financial condition and results of operations for the ninethree months ended September 30, 2017March 31, 2018 in conjunction with our unaudited condensed consolidated financial statements and notes thereto set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q. Such discussion and analysis includes forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. You should also read “Special Note Regarding Forward-Looking Statements” in the section following the table of contents of this report.
OVERVIEW
We have continuedare primarily a transition from being a primarily content-based media company to a primarily technology-focused company. Our KanKan social media data intelligence platform serves as the basis for our development and deployment of artificial-intelligence-based solutions for businesses and software developers in many industries and geographies.geographies, with a current focus on Asia. We also own and operate digital media properties across multiple verticals, such asVegas.com, an online agency catering to the travel and entertainment young adult lifestyledesires of visitors to the Las Vegas area and personal finance, that deliver relevant, dynamic content that attracts and engages users on a global scale.those of Las Vegas locals.
During the ninethree months ended September 30, 2017, we earned most of ourMarch 31, 2018, consolidated revenue from sales of travel and entertainment products such as show tickets and hotel rooms with variousrepresented approximately 93% and 83% of Travel & Entertainment segment revenue and consolidated revenue, respectively. Data Platform Services revenue from KanKan represented substantially all of the revenue from our Technology & Data Intelligence segment, and approximately 7% of consolidated revenue. Various advertising mechanisms and merchandise sales also contributingcontributed approximately 7% to our consolidated revenue.
We also recognized revenue from KanKan’s new products.plan to accelerate our development of products and services based upon our KanKan data intelligence platform during the next 12 to 18 months. We have significantly increased our headcount in our KanKan operations since the third quarter of 2017 to support such accelerated development, and we expect to add more personnel as our product development continues.
With regard to the operationsThe trend of our travel and entertainmentsales from mobile online sources in the Travel & Entertainment segment continues to track with the overall industry trend of increasing use of mobile devices. As a result, we will continue our sales via mobile devices continued to represent a significant percentage of total sales. We intend to continue investing in improvements to our mobile platform. We view improving andrecent focus on expanding our presence on mobile devices asand improving the best way in whichuser experience on our mobile online offerings. Improvements we can differentiate our Vegas.com offerings from our competitors’ offerings, as our competitors inhave made over the Las Vegas market tend to be “brick-and-mortar” operations, and drive increases in revenue.
Our recent improvementslast several quarters to the desktop experience of our customers has for example, led to significant improvement in conversion rates related to entertainment bookings. Therefore, while we will continue to focus on our mobile platform, we will also continue to make improvements to the desktop experience. We also gave notice to our partner in the operation of the LasVegas.com website that we would end our co-management of the website and assume full control over operation of the website. Although it has not significantly impacted our operating results, we launched an improved version of the LasVegas.com website in July 2017 with many of the same improvements that we have implemented on the Vegas.com website and mobile application, which we believe will improve the revenue stream from the LasVegas.com website.
Matters Affecting Comparability of Results
We completed the CBG Acquisition on September 20, 2016. Our financial condition at September 30, 2017, and our results of operations for the three and nine months ended September 30, 2017 include the results from our subsidiaries acquired in the CBG Acquisition, while the same periods in 2016 only include nominal results from our subsidiaries acquired in the CBG Acquisition.
CRITICAL ACCOUNTING POLICIES
During the three and nine months ended September 30, 2017,March 31, 2018, we made no material changes to our critical accounting policies as we disclosed them in Part II, Item 7 of our 20162017 Form 10-K.
RESULTS OF OPERATIONS
The following discussion summarizes our operating results for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.
Reportable Segment Results
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Change |
| | | 2017 | | 2016 | | Dollars | | Percentage |
| Revenue, net | | $ | 16,284 |
| | $ | 14,891 |
| | $ | 1,393 |
| | 9 | % |
| Sales and marketing | | 6,151 |
| | 4,742 |
| | 1,409 |
| | 30 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
| | 2018 | | 2017 | | Dollars | | Percentage |
| Revenue | | $ | 14,898 | | $ | 14,193 | | $ | 705 | | 5 | % |
| | | | | | | | |
| Cost of revenue | | 2,765 | | 2,565 | | 200 | | 8 | % |
| Sales and marketing | | 6,664 | | 5,753 | | 911 | | 16 | % |
| Technology and development | | 626 | | 625 | | 1 | | — | % |
| General and administrative | | 4,774 | | 4,626 | | 148 | | 3 | % |
| Depreciation and amortization | | 2,127 | | 2,040 | | 87 | | 4 | % |
| Other operating expense | | 43 | | 39 | | 4 | | 10 | % |
|
| | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | Change |
| | | 2017 | | 2016 | | Dollars | | Percentage |
| Revenue, net | | $ | 45,765 |
| | $ | 42,668 |
| | $ | 3,097 |
| | 7 | % |
| Cost of revenue | | 8,144 |
| | 7,627 |
| | 517 |
| | 7 | % |
| Sales and marketing | | 17,531 |
| | 14,840 |
| | 2,691 |
| | 18 | % |
| Technology and development | | 1,877 |
| | 638 |
| | 1,239 |
| | 194 | % |
| General and administrative | | 13,744 |
| | 14,257 |
| | (513 | ) | | (4 | )% |
Our reportable segment results during the three and nine months ended September 30, 2017 in comparisonRevenue. We continue to the same periods of 2016, including the increase in net revenue, were primarily affected by the various improvements we have made to our sales channels, primarily the Vegas.com website and mobile application. The improvements led to an increase in ourexperience increased conversion of traffic through our sales channels, which boosted show ticket sales. The increased show ticket sales, as well as improved commission rates we earn on sales of third-party show tickets, increased net revenue during the three and nine months ended September 30, 2017March 31, 2018 by approximately $1.2 million and $5.0 million, respectively, and contributed to corresponding increases in cost of revenue, and in sales and marketing expense.$2.0 million.
The increased net revenue from show ticket sales during the nine months ended September 30, 2017 was partially offset by a net revenue decrease of approximately $1.3$0.9 million from hotel transactions that primarily resulted from macroeconomic conditionsintense and direct competition from a large market participant that caused us to slow our spend on paid search marketing related to lodging at the same time we were increasing paid search marketing related to show tickets. Various immaterial declines in other revenue categories also contributed to offsetting of the increase resulting from show ticket sales.
Sales and marketing. The increase in our sales and marketing expense in the Travel & Entertainment segment was driven primarily by a $1.1 million increase in paid search marketing cost at Vegas.com. The increase resulted from the competitive nature of the paid search marketplace as well as declines in trafficfrom recent changes to the LasVegas.com website. The declines in site traffic, which had been continuing for a long period of time, prompted us to make the decision several fiscal quarters ago to assume full control over operation of the LasVegas.com website. We assumed full control as of July 1, 2017, and we believeway that the improvements we continuelargest search engine displays ads. The increases in conversion of traffic allowed Vegas.com to makespend more in paid search to increase market share, which resulted in more transactions and increased revenue.
Technology & Data Intelligence
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
| | 2018 | | 2017 | | Dollars | | Percentage |
| Revenue | | $ | 1,183 | | $ | 131 | | $ | 1,052 | | 803 | % |
| | | | | | | | |
| Cost of revenue | | 1,193 | | 3 | | 1,190 | | 39,667 | % |
| Sales and marketing | | 37 | | 3 | | 34 | | 1,133 | % |
| Technology and development | | 167 | | 115 | | 52 | | 45 | % |
| General and administrative | | 1,020 | | 483 | | 537 | | 111 | % |
| Depreciation and amortization | | 156 | | 103 | | 53 | | 51 | % |
| Other operating expense | | 22 | | 6 | | 16 | | 267 | % |
Revenue and Cost of revenue. We did not begin our Data Platform Services business until the new versionsecond half of 2017, resulting in the website will begin to improveincreases in revenue and in cost of revenue noted above for the revenue stream from LasVegas.com.
The increase in Technology and development expense during the ninethree months ended September 30, 2017 relatesMarch 31, 2018.
General and administrative. Our recent personnel increase (which consists almost exclusively of IT-related employees) to licensing fees we incurredaccelerate product development resulted in relation to the LasVegas.com website beginning in July 2016 when the term of the related agreement became month-to-month. Prior to July 2016, our payments under the agreement were reducing a previously-established liability related to the portion of the agreement term during which we were committed to make payments.
Late in 2016, we restructured the staff in our travel and entertainment segment, which drove a $0.7 million decreaseincrease in payroll and related costs,cost. The increase in payroll and related cost was partially offset by a $0.3 million decrease in stock-based compensation expense related to the decline in our stock price, which is reported in General and administrative expense, duringan input into the nine months ended September 30, 2017 comparedmodel that we use each balance sheet date to remeasure the same period of 2016.liability associated with the China Cash Bonuses we award.
Consolidated Results
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2018 | | 2017 | | Dollars | | Percentage |
| Revenue | $ | 16,724 | | $ | 15,299 | | $ | 1,425 | | 9 | % |
| | | | | | | |
| Cost of revenue | 4,032 | | 2,664 | | 1,368 | | 51 | % |
| Sales and marketing | 6,895 | | 5,875 | | 1,020 | | 17 | % |
| Technology and development | 902 | | 908 | | (6) | | (1) | % |
| General and administrative | 23,317 | | 8,326 | | 14,991 | | 180 | % |
| Depreciation and amortization | 2,718 | | 2,861 | | (143) | | (5) | % |
| Other operating expense | 66 | | 45 | | 21 | | 47 | % |
| | | | | | | |
| Interest expense | (1,406) | | (1,018) | | (388) | | 38 | % |
| Other income (expense) | 11 | | 19 | | (8) | | (42) | % |
| Change in FV of warrant liability | 8,610 | | 6,569 | | 2,041 | | 31 | % |
| Other gain (loss) | (31) | | (31) | | — | | — | % |
| Benefit from (provision for) income taxes | (31) | | (184) | | 153 | | (83) | % |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Change |
| | | 2017 | | 2016 | | Dollars | | Percentage |
| Revenue, net | | $ | 19,449 |
| | $ | 15,142 |
| | $ | 4,307 |
| | 28 | % |
| Cost of revenue | | 5,641 |
| | 2,864 |
| | 2,777 |
| | 97 | % |
| Sales and marketing | | 6,326 |
| | 4,887 |
| | 1,439 |
| | 29 | % |
| General and administrative | | 9,971 |
| | 7,921 |
| | 2,050 |
| | 26 | % |
| Loss on debt extinguishment | | — |
| | (9,157 | ) | | 9,157 |
| | (100 | )% |
| Change in FV of warrant liability | | (5,978 | ) | | (647 | ) | | (5,331 | ) | | 824 | % |
|
| | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | Change |
| | | 2017 | | 2016 | | Dollars | | Percentage |
| Revenue, net | | $ | 52,004 |
| | $ | 44,371 |
| | $ | 7,633 |
| | 17 | % |
| Cost of revenue | | 12,270 |
| | 7,837 |
| | 4,433 |
| | 57 | % |
| Sales and marketing | | 17,975 |
| | 15,349 |
| | 2,626 |
| | 17 | % |
| Technology and development | | 2,657 |
| | 1,904 |
| | 753 |
| | 40 | % |
| General and administrative | | 26,656 |
| | 24,251 |
| | 2,405 |
| | 10 | % |
| Depreciation and amortization | | 8,265 |
| | 7,401 |
| | 864 |
| | 12 | % |
| Loss on debt extinguishment | | — |
| | (9,157 | ) | | 9,157 |
| | (100 | )% |
| Provision for income taxes | | (603 | ) | | — |
| | (603 | ) | |
|
Consolidated results of operations were primarily impacted by the results of operations of our travel and entertainment segment,reportable segments, as described above. Additionally, the operations of the subsidiaries we acquired in the CBG Acquisition had the following effects during the three
General and nine months ended September 30, 2017:
increased net revenue by $0.7 million and $1.7 million, respectively
increased Cost of revenue by $0.6 million and $0.9 million, respectively
increased Generaladministrative. The general and administrative expense incurred by $0.4 million and $1.6 million, respectivelyour non-reportable-segment businesses was affected by the following:
KanKan’s new products also began earning revenue during the three and nine months ended September 30, 2017, causing increases in net revenue of $2.2 million and $3.2 million, respectively. Cost of revenue related to the launch of the new products caused increases of $2.0 million and $3.0 million, respectively, but we expect that cost of revenue will be significantly lower in the future because of the one-time nature of certain data-related costs we incurred in connection with the launch of one product on an accelerated time frame, and also as volume increases and as we build internal infrastructure.
Our share-based compensation expense, which we include in General and administrative expense, increased by $1.0 million during the three months ended September 30, 2017. The increase resulted from significantly more stock options in the current year with early vesting.
| | | | | | | | |
| | |
| In January 2018, we recognized a grant of Contentsan option to purchase 1.3 million shares of our common stock at an exercise price of $7.81 per share to one of our executives, resulting in $11.6 million of stock-based compensation expense. No similar award was granted during the first quarter of the prior year. | 21 |
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| — | In March 2018, we abandoned certain leased property prior to the end of the lease contract. We were able to sublet the majority of the space to third parties, but the early abandonment led to our recognition of a liability that increased rent expense by $2.3 million during the three months ended March 31, 2018. No similar transactions occurred during the first quarter of the prior year. | |
Payroll and related cost, exclusive of share-based compensation expense, increased by $0.7 million and $1.3 million, respectively, during the three and nine months ended September 30, 2017. The $0.5 million increase primarily resulted from acceleration of product development in our KanKan operations, which also accounted for approximately half of the year-to-date increase compared to the same period of 2016. The remaining year-to-date increase primarily relates to the hiring of two senior management positions in the fourth quarter of 2016 and early second quarter of 2017, plus routine salary increases.
Rent expense increased by $0.4 million during the nine months ended September 30, 2017.
During September of 2016, we amended the financing agreement with our lenders in conjunction with the CBG Acquisition, which resulted in a loss on debt extinguishment.
The increase in our provision for taxes arises from differences between the amortization of certain goodwill and intangible assets for tax purposes compared to book.
LIQUIDITY AND CAPITAL RESOURCES
Overview
During the ninethree months ended September 30, 2017,March 31, 2018, and in each fiscal year since our inception, we have incurred net losses and generated negative cash flow from operations, resultingwhich have resulted in an accumulated deficit of $210.7$313.7 million and aas of March 31, 2018. Additionally, our operations have historically used more cash than they have provided. As of March 31, 2018, our cash and cash equivalents balance was $21.9 million, and we had a negative working capital balance of $16.0 million, both amounts as of September 30, 2017.$29.4 million. Our net revenue during the ninethree months ended September 30, 2017March 31, 2018 was $52.0$16.7 million.
During the nine months ended September 30, 2017, we issuedWe are a total of 3,052,897 shares of our common stockparty to investors in exchange for approximately $8.3 million in cash.
On September 24, 2015, concurrently with the closing of the VDC Acquisition, we entered into the Financing Agreement, pursuant to which the Lenders have extended credit to the Borrowers consisting of the Loan in the aggregate principal amount of $27.5$35.5 million.
On September 20, 2016, concurrently with the closing of the CBG Acquisition, we entered into the Financing Amendment which, among other changes, increased the Loan by $8.0 million to a total aggregate principal amount of $35.5 million. The Loan amount outstanding accrues interest at three-month LIBOR plus 10.0% per annum, payable monthly, and the Loan has a maturity date of September 24, 2018. The Financing Agreement and related documents also provide for certain fees payable to the Lenders, including a $3.25$3.5 million exit fee, and for the issuance of the VDC Financing Warrants, which provide the holders with the rightcertain warrants to sell the warrant back to Remark on its expiration date in exchange for $3.0 million in cash (reduced pro rata based on the percentagepurchase shares of our common stock. The terms of the warrant exercised)Financing Agreement, the amendments thereto, and related documents effective as of March 31, 2018 are described in Note 11. As of September 30, 2017,March 31, 2018, $35.5 million of aggregate principal remained outstanding under the Loan. Our available cash and other liquid assets are not sufficient to pay our obligations under the Financing Agreement in full.
The Financing Agreement contains certain affirmative and negative covenants, including but not limited to financial covenants with respect to quarterly EBITDA levels and the value of our assets. If we fail to comply with any financial covenant under the Financing Agreement going forward, under certain circumstances after a cure period, the Lenders may demand the repayment of the Loan amount outstanding and unpaid interest thereon, which could have a material adverse effect on our financial condition. As of September
On April 30, 2017,2018, we were notentered into the Fourth Financing Amendment, which provides for, among other things, (i) a reduction in compliance with the covenantinterest rate on the remaining amount outstanding under the Financing Agreement requiringto three-month LIBOR plus 8.5% per annum, (ii) an extension of the maturity date under the Financing Agreement to September 30, 2020, (iii) a modification of certain of our covenants under the Financing Agreement, including covenants regarding capital expenditures, minimum value of certain of our assets, consolidated EBITDA of RemarkVegas.com and its subsidiaries, forand revenue generated by KanKan, (iv) an increase in the trailing twelve-month period ended September 30, 2017 of $(1.5) million, asamount we are permitted to invest in our actual consolidated EBITDA for such period was $(4.4) million. On October 25, 2017, we entered into the Second Financing Amendment, pursuant to whichnon-U.S. subsidiaries operating our KanKan business, (v) a waiver by the Lenders waived specifiedof certain events of default under the Financing Agreement including with respect to (i) minimum consolidated EBITDAand (vi) a prepayment by the Borrowers of Remark$8.0 million principal amount outstanding and its subsidiaries for the trailing twelve-month periods ended June 30, 2017 and September 30, 2017, (ii) minimum value$3.5 million of certain of our assets for the fiscal quarters ended June 30, 2017 and September 30, 2017 and (iii) minimum restricted cash balance through September 19, 2017. Our available cash and other liquid assets are not sufficient to pay our obligationsexit fees under the Financing Agreement in full.within 60 days following the date of the Fourth Financing Amendment. In consideration for the Lenders’ entry into the Fourth Financing Amendment, we also paid a closing fee of approximately $413 thousand. We are actively assessing means of obtaining additional capital for the payment of the amounts required under the Fourth Financing Amendment, which may include, among other things, equity financing or divesting of certain assets or businesses.
On September 24, 2015, concurrently with the closing of the VDC Acquisition, Vegas.com entered into a Letter of Credit Facility Agreement with Bank of America, N.A., which currently expires on May 31, 2018 and which we expect to renew for another year, providing for a letter of credit facility with up to $9.3 million of availability. Amounts available under the letter of credit facility are subject to customary fees and are secured by a first-priority lien on, and security interest in, a cash collateral account with the bank containing cash equal to 101.25% of the aggregate outstanding undrawn face amount of all letters of credit under the letter of credit facility outstanding.
On April 12, 2017, we issued a short-term note payable in the principal amount of $3.0 million to a private lender in exchange for cash in the same amount. The agreement, which does not have a stated interest rate, required us to repay the note plus a fee of $115,000$115 thousand on the maturity date of June 30, 2017. The note is accruing interest at $500 per day on the unpaid principal until we repay the note in full.
InPursuant to the second quarterterms of each year following a performance period,the purchase agreement we entered into in connection with the VDC Acquisition, we are obligated to make certain cash payments stipulated in the VDC Acquisition that are contingent uponan earnout payment based on the performance of Vegas.com in the yearyears ended December 31, 2016, and in the years ending December 31, 2017 and 2018. We expect thatThe earnout payments are due in the second quarter of the immediately following year. The performance of Vegas.com during the year ended December 31, 2017 will exceedexceeded the threshold triggering the maximum earnout payment of $1.0 million. We have not yet paid the portionmillion for such year.
On November 9, 2016, we entered into the Aspire Purchase Agreement with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we may sell to Aspire Capital is committed to purchase up to an aggregate of $20.0 million of shares of our common stock over the 30-month term of the Aspire Purchase Agreement. On September 18, 2017, we entered into a First Amendment to the Aspire Purchase Agreement, which provides that the parties may mutually agree to increase the number of shares of our common stock that may be purchased per business day pursuant to the terms of the Aspire Purchase Agreement to 2,000,000 shares. Pursuant to the Aspire Purchase Agreement, we issued 1,879,699We did not issue shares of our common stock to Aspire Capital in exchange for $5.0 million in cash during the nine months ended September 30, 2017. On October 30, 2017, we issued an additional 1,639,583 shares of our common stock to Aspire Capital in exchange for $5.3 million in cash pursuant to the Aspire Purchase Agreement.Agreement during the three months ended March 31, 2018. As of November 10, 2017,May 11, 2018, Aspire Capital has purchased a total of $12.8 million of shares of our common stock under the Aspire Purchase Agreement.
We cannot provide assurance that revenue generated from our businesses will be sufficient to sustain our operations in the long term;term (including but not limited to payment of the amounts required under the Fourth Financing Amendment); therefore, we have implemented measures to reduce operating costs, and we continuously evaluate other opportunities to reduce costs. Additionally, we are actively assessing the sale of certain non-core assets, considering sales of minority interests in certain of our operating businesses, and evaluating potential acquisitions that would provide additional revenue. However, we may need to obtain additional capital through equity financing, debt financing, or by divesting of certain assets or businesses.
Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions, will play primary roles in determining whether we can successfully obtain additional capital. Additionally, pursuant to the Financing Agreement, we are subject to certain limitations on our ability and the ability of our subsidiaries to, among other things, incur additional debt and transfer, sell or otherwise dispose of assets, without the consent of the Lenders. We cannot be certain that we will be successful at raising additional capital.
A variety of factors, many of which are outside of our control, affect our cash flow; those factors include regulatory issues, competition, financial markets and other general business conditions. Based on our historical track record and projections, we believe that we will be able to meet our ongoing requirements through September 30, 2018,March 31, 2019, (including repayment of our existing debt as it matures) with existing cash, cash equivalents and cash resources, and based on the probable success of one or more of the following plans:
monetize existing assets
work with our creditors to modify existing arrangements or refinance our debt
obtain additional capital through equity issuances, including but not limited to under the Aspire Purchase Agreement (which issuances may dilute existing stockholders)
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| — | 23monetize existing assets | |
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| — | work with our creditors to modify existing arrangements or refinance our debt | |
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| — | obtain additional capital through equity issuances, including but not limited to under the Aspire Purchase Agreement (which issuances may dilute existing stockholders) | |
However, projections are inherently uncertain and we cannot assure you that we will generate sufficient income and cash flow to meet all of our liquidity requirements.
Cash Flows - Operating Activities
We generated $2.6$0.9 million moreless cash from operating activities during the ninethree months ended September 30, 2017March 31, 2018 than we did during the ninethree months ended September 30, 2016.March 31, 2017. The increasedecrease in cash provided by operating activities is a result of the timing of payments related to elements of working capital.
Cash Flows - Investing Activities
During the ninethree months ended September 30, 2016,March 31, 2018, we paid approximately $7.3 million for the CBG Acquisition, while we made no business acquisitions during the nine months ended September 30, 2017. Our expenditure of $0.2spent $0.6 million more to purchase property and equipment than we did during the same period of 2016 partially offset the decrease resulting from the lack of business acquisitions in 2017.
Cash Flows - Financing Activities
DuringWe received $0.3 million of cash as a result of stock option exercises during the ninethree months ended September 30, 2017,March 31, 2018, in comparison to the $1.3 million we obtained approximately the same amountcollected from issuance of cash from financing activities as we didshares of our common stock to private investors during the same period of 2016.2017.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
Please refer to Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this report for a discussion regarding recently issued accounting pronouncements which may affect us.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
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ITEM 4. | CONTROLS AND PROCEDURES |
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to provide reasonable assurance that the information we must disclose in reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We designed our disclosure controls with the objective of ensuring we accumulate and communicate this information to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under Exchange Act, as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of September 30, 2017.March 31, 2018.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fiscal quarter ended September 30, 2017March 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
NoneITEM 1. LEGAL PROCEEDINGS
On February 21, 2018, we initiated a legal proceeding against CBG, Adam Roseman, and CBG’s Joint Official Liquidators (the “CBG Litigation”) arising from our acquisition of assets of CBG in September 2016. The CBG Litigation was filed in the United States District Court for the District of Nevada and is captioned as Remark Holdings, Inc., et al. v. China Branding Group, Limited (In Official Liquidation), et al., Case No. 2:18-cv-00322. In the CBG Litigation, we are seeking a declaration from the court that we are entitled to rescission of the CBG Purchase Agreement and all transactions related to the CBG Acquisition, a declaration that the CBG Purchase Agreement and the transactions consummated pursuant thereto be rescinded and void ab initio, a declaration that we are not required to deliver CBG Acquisition Warrants allowing for the purchase of 5,710,000 shares of common stock at a per-share exercise price of $10.00, an order directing release to us of any consideration held in escrow in connection with the CBG Acquisition, and disgorgement of all consideration paid by us in connection with the
CBG Acquisition. We are alleging that the defendants fraudulently mispresented and concealed material information regarding the companies we acquired in the CBG Acquisition. We are in the process of serving the summonses upon all of the defendants, certain of which have been served.
ITEM 1A. RISKFACTORS
Not applicable
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ITEM 2. | ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On September 5, 2017, we issued a total of 751,880 shares of our common stock to an accredited investor in a private placement in exchange for $2.0 million. Except for an amount equal to the par value of the shares issued, we recorded the proceeds in additional paid-in capital.
None
We made the offer and sale of securities in the above-described private placement in reliance upon an exemption from registration requirements pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended, based upon representations made to us by the investor in a purchase agreement we entered into with the investor.
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ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
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| | | | Incorporated Herein By Reference To |
| Exhibit Number | | Description | | Document | | Filed On | | Exhibit Number |
| | | | 8-K | | 01/24/2018 | | 10.1 |
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| 101.INS | | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | |
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| | | | | Incorporated Herein By Reference To |
| Exhibit Number | | Description | | Document | | Filed On | | Exhibit Number |
| | | | 8-K | | 09/19/2017 | | 10.1 |
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| 101.INS | | XBRL Instance Document | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | |
SIGNATURES
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.
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| | | | REMARK HOLDINGS, INC. |
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| Date: | May 14, 2018 | By: | | REMARK HOLDINGS, INC. |
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Date: | November 13, 2017 | By: | | /s/ Douglas Osrow |
| | | | Douglas Osrow |
| | | | Chief Financial Officer |
| | | | (principal financial officer) |
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| | | | Douglas Osrow |
| 27 | | | Chief Financial Statement IndexOfficer |
| | | | (principal financial officer) |
