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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12552860&doc=10
Commission File Number 001-33720
Remark Holdings, Inc.


 
Delaware
 
33-1135689
 
 
State of Incorporation
 
IRS Employer Identification Number
 
 
 
 
 
 
 
3960 Howard Hughes Parkway, Suite 900
Las Vegas, NV 89169
 
702-701-9514
 
 
Address, including zip code, of principal executive offices
 
Registrant’s telephone number, including area code
 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer

Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 13, 2018, a total of 36,668,696 shares of our common stock were outstanding.



TABLE OF CONTENTS


PART I
 
 
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The matters discussed in this Quarterly Report on Form 10-Q include “forward-looking statements” about the plans, strategies, objectives, goals or expectations of Remark Holdings, Inc. and subsidiaries (“Remark”, “we”, “us”, “our”). You will find forward-looking statements principally in the sections entitled Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations. Such forward-looking statements are identifiable by words or phrases indicating that Remark or management “expects,” “anticipates,” “plans,” “believes,” or “estimates,” or that a particular occurrence or event “will,” “may,” “could,” “should,” or “will likely” result, occur or be pursued or “continue” in the future, that the “outlook” or “trend” is toward a particular result or occurrence, that a development is an “opportunity,” “priority,” “strategy,” “focus,” that we are “positioned” for a particular result, or similarly-stated expectations. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report or such other report, release, presentation, or statement.

In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this report and other periodic reports filed with the Securities and Exchange Commission (“SEC”), there are many important factors that could cause actual results to differ materially. Such risks and uncertainties include general business conditions, changes in overall economic conditions, our ability to integrate acquired assets, the impact of competition and other factors which are often beyond our control.

This should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, operations, liquidity, financial condition and prospects. We undertake no obligation to update or revise our forward-looking statements to reflect developments that occur or information that we obtain after the date of this report.







PART I FINANCIAL INFORMATION


ITEM 1.
FINANCIAL STATEMENTS

REMARK HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share amounts)

 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
9,902

 
$
22,632

Restricted cash
11,655

 
11,670

Trade accounts receivable, net
4,753

 
3,673

Prepaid expense and other current assets
8,710

 
5,518

Notes receivable, current
100

 
290

Total current assets
35,120

 
43,783

Notes receivable

 
100

Property and equipment, net
11,630

 
13,387

Investment in unconsolidated affiliates
2,030

 
1,030

Intangibles, net
19,950

 
23,946

Goodwill
20,099

 
20,099

Other long-term assets
1,620

 
1,192

Total assets
$
90,449

 
$
103,537

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
23,956

 
$
17,857

Accrued expense and other current liabilities
12,034

 
18,795

Deferred merchant booking
8,727

 
9,027

Contract liability
5,049

 
3,691

Note payable
3,000

 
3,000

Current maturities of long-term debt, net of unamortized discount and debt issuance cost
37,319

 
38,085

Total current liabilities
90,085

 
90,455

Warrant liability
7,072

 
89,169

Other liabilities
3,296

 
3,501

Total liabilities
100,453

 
183,125

 
 
 
 
Commitments and contingencies (Note 13)


 


 
 
 
 
Preferred stock, $0.001 par value; 1,000,000 shares authorized; none issued

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 36,468,696 and 28,406,026 shares issued and outstanding; each at September 30, 2018 and December 31, 2017, respectively
36

 
28

Additional paid-in-capital
304,006

 
220,117

Accumulated other comprehensive income
48

 
115

Accumulated deficit
(314,094
)
 
(299,848
)
Total stockholders’ deficit
(10,004
)
 
(79,588
)
Total liabilities and stockholders’ deficit
$
90,449

 
$
103,537

See Notes to Unaudited Condensed Consolidated Financial Statements


REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(dollars in thousands, except per share amounts)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
19,351

 
$
19,449

 
$
56,788

 
$
52,004

Cost and expense
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization)
4,393

 
5,641

 
14,557

 
12,270

Sales and marketing
7,213

 
6,326

 
20,884

 
17,975

Technology and development
842

 
865

 
2,587

 
2,657

General and administrative
10,444

 
9,971

 
44,941

 
26,656

Depreciation and amortization
2,756

 
2,482

 
8,220

 
8,237

Impairments

 
28

 

 
28

Other operating expense
117

 
66

 
264

 
168

Total cost and expense
25,765

 
25,379

 
91,453

 
67,991

Operating loss
(6,414
)
 
(5,930
)
 
(34,665
)
 
(15,987
)
Other income (expense)
 
 
 
 
 
 
 
Interest expense
(1,307
)
 
(1,080
)
 
(3,968
)
 
(3,279
)
Other income, net
1

 

 
56

 
20

Change in fair value of warrant liability
3,525

 
(5,978
)
 
22,190

 
2,351

Other gain (loss)
(12
)
 
(33
)
 
511

 
(85
)
Total other income (expense), net
2,207

 
(7,091
)
 
18,789

 
(993
)
Loss before income taxes
(4,207
)
 
(13,021
)
 
(15,876
)
 
(16,980
)
Benefit from (provision for) income taxes
442

 
(229
)
 
1,437

 
(603
)
Net loss
$
(3,765
)
 
$
(13,250
)
 
$
(14,439
)
 
$
(17,583
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(82
)
 
48

 
(67
)
 
20

Comprehensive loss
$
(3,847
)
 
$
(13,202
)
 
$
(14,506
)
 
$
(17,563
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding, basic and diluted
35,463

 
22,811

 
33,608

 
22,744

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
$
(0.11
)
 
$
(0.58
)
 
$
(0.43
)
 
$
(0.77
)
 
 
 
 
 
 
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements


REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(dollars in thousands)

 
Nine Months Ended September 30,
 
2018
 
2017
Net cash provided by (used in) operating activities
$
(18,691
)

$
616

Cash flows from investing activities:
 
 
 
Proceeds from disposition of assets
629

 

Purchases of property, equipment and software
(2,728
)
 
(2,631
)
Acquisition of unconsolidated affiliate
(480
)
 
(29
)
Net cash used in investing activities
(2,579
)

(2,660
)
Cash flows from financing activities:

 

Proceeds from issuance of common stock, net
10,951

 
8,315

Proceeds from debt issuance

 
3,000

Payment of loan fees and debt issuance cost
(1,526
)
 

Payment of contingent consideration in business acquisitions
(900
)
 

Payments of capital lease obligations

 
(179
)
Net cash provided by financing activities
8,525


11,136

Net change in cash, cash equivalents and restricted cash
(12,745
)

9,092

Cash, cash equivalents and restricted cash:


 
 
Beginning of period
34,302

 
18,548

End of period
$
21,557

 
$
27,640

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
3,426

 
$
3,031

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Issuance of common stock upon warrant exercise
$
59,907

 
$

Issuance of common stock upon conversion of debt instruments
$

 
$
121

Common stock subscription payable
$
520

 
$

See Notes to Unaudited Condensed Consolidated Financial Statements


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 data intelligence platform serves as the basis for our development and deployment of artificial-intelligence-based solutions for businesses 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, 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 nine months ended September 30, 2018, and in each fiscal year since our inception, we have incurred net losses which have resulted in an accumulated deficit of $314.1 million as of September 30, 2018. Additionally, our operations have historically used more cash than they have provided. As of September 30, 2018, our cash and cash equivalents balance was $9.9 million, and we had a negative working capital balance of $55.0 million. Our revenue during the nine months ended September 30, 2018 was $56.8 million.

On July 2, 2018, we entered into a common stock purchase agreement (the “2018 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 have the right to direct Aspire Capital to purchase up to an aggregate of $30.0 million of shares of our common stock over the 30-month term of the 2018 Aspire Purchase Agreement. The 2018 Aspire Purchase Agreement, which we describe in more detail in Note 14, terminated and replaced the common stock purchase agreement we had entered into with Aspire Capital on November 9, 2016 (the “2016 Aspire Purchase Agreement”).

Concurrently with entering into the 2018 Aspire Purchase Agreement, we also entered into a registration rights agreement with Aspire Capital, in which we agreed to file with the Securities and Exchange Commission (the “SEC”) one or more registration statements, as necessary, and to the extent permissible and subject to certain exceptions, to register under the Securities Act of 1933, as amended, the sale of the shares of our common stock that may be issued to Aspire Capital under the 2018 Aspire Purchase Agreement. We have filed with the SEC a prospectus supplement to our effective shelf Registration Statement on Form S-3 (File No. 333-225448) registering all of the shares of common stock that may be offered to Aspire Capital from time to time under the 2018 Aspire Purchase Agreement. As of September 30, 2018, Aspire Capital has purchased $10.0 million of shares of our common stock under the 2018 Aspire Purchase Agreement.

During the nine months ended September 30, 2017, we issued a total of 3,052,897 shares of our common stock to investors in exchange for approximately $8.3 million in cash, including a $5.0 million issuance to Aspire. We did not issue our common stock in private sales during the nine months ended September 30, 2018, although we did receive cash from the issuances to Aspire Capital and from stock option exercises.

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 extended credit to the Borrowers consisting of a term loan in the aggregate principal amount of $35.5 million (the “Loan”). The terms of the Financing Agreement, the amendments thereto, and related documents effective as of September 30, 2018 are described in Note 11, which also describes our ongoing event of default relating to our failure to make certain required payments under the Financing Agreement as well as certain other ongoing events of default.

We cannot provide assurance that revenue generated from our businesses will be sufficient to sustain our operations in the long term (including but not limited to payment of the amounts required under the Financing Agreement); therefore, we are actively evaluating strategic alternatives including the potential sale of certain non-core assets, investment assets and operating businesses. However, we may need to obtain additional capital through equity financing or debt financing. 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 financial projections, we believe that we will be able to meet our ongoing requirements for at least the next 12 months following this report (including the amounts required under the Financing Agreement, based on the current status of discussions with the Lenders regarding ongoing events of default) 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 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, 2017 Consolidated Balance Sheet to conform to the current presentation as of September 30, 2018. Specifically, we reclassified liabilities associated with gift cards and similar items from contract liability to other current liabilities as we continue to clarify our disclosures related to the newly-adopted revenue standard.


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2018, with the audited Consolidated Balance Sheet amounts as of December 31, 2017 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, 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 the Annual Report on Form 10-K (the “2017 Form 10-K”).


Consolidation

We include all of our subsidiaries, which include the VIEs for which we are the primary beneficiary, in our consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.





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 the WFOE, while the VIEs are companies formed in China under local laws which are owned by members of our management team. We funded the registered capital and operating expenses of the VIEs by extending loans to the VIEs’ owners. We are the primary beneficiary of the VIEs because the relationships between the VIEs and our WFOE are governed by contractual agreements, including in each case an Exclusive Call Option Agreement, an Exclusive Business Cooperation Agreement, a Proxy Agreement and an Equity Pledge Agreement, which give us control over 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 and nine months ended September 30, 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, most of which results from the use of the merchant model under which we remain the merchant of record, but 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.). Though we are the merchant of record for transactions in which other entities provide the ultimate service, under current accounting guidance we are an agent in such transactions; therefore, we recognize revenue from transactions



under the merchant model on a net basis (i.e., the amount we bill to our customers less the amounts we pay to the service providers).

To a lesser extent, we provide tour services directly to our customers. Our obligation to provide such services is satisfied at the point in time that we finish providing the tour, and we recognize the resulting revenue on a gross basis when our obligation is satisfied.

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 (net of amounts owed to suppliers). 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. One of the business’s product offerings involves utilizing our proprietary data intelligence software to provide high-quality loan candidates to our customers, which are companies that help to market the loan products of banks and other lending institutions in China to potential loan candidates. We earn a commission for this service, which is deemed earned and is recognized at the point in time at which the related loan is issued to the candidate by a lending institution supporting the loan product being promoted by our customer. The amount of commission we recognize is determined by multiplying the commission rate specified in the applicable contract by the amount of the loan issued to the candidate.

Under contracts with two of our customers, we are required to reimburse those customers for as much as 10% of the commissions paid under the contract if the total amount of the defaults across all of the loans issued and outstanding with respect to such contract exceeds an established threshold (the “Reimbursement Obligation”). Such contracts also require us to maintain a cash deposit with those customers to support the Reimbursement Obligation, and they permit the customer to deduct the required amount of any reimbursement from such deposit. We no longer provide new candidates to those customers under those particular contracts, and none of our remaining contracts related to providing loan candidates to customers include the Reimbursement Obligation or similar terms, so the maximum amount of our liability with respect to the Reimbursement Obligation as of September 30, 2018 and going forward is $0.5 million, Further, as of September 30, 2018, the amount we have on deposit with the customers under those contracts to support the Reimbursement Obligation exceeds such maximum liability with respect to the Reimbursement Obligation, and we have not reimbursed any customer any amount of commissions paid under these contracts, nor are we required to do so because the total amount of the defaults has not exceeded the established threshold.

We have determined that the Reimbursement Obligation does not fall within the scope of ASC 606 and that we should account for it as a guarantee for accounting purposes using other GAAP. We recorded an initial liability, reported in Accrued expense and other current liabilities in our consolidated balance sheet, equal to our maximum potential Reimbursement Obligation, an amount which approximated fair value. As we are released from an amount of the Reimbursement Obligation, we record the amount of reduction in the Reimbursement Obligation as data platform services revenue. We have not recorded material amounts of revenue resulting from being released from the Reimbursement Obligation.

We also generate revenue by creating and delivering integrated artificial-intelligence-based solutions for clients. Under this type of contract, we provide a single, continuous service to clients who control the assets as we create them. Accordingly, we recognize the revenue over the period of time during which we provide the service.


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 changes to our significant accounting policies as reported in our 2017 Form 10-K.


Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board 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. We are designing appropriate internal controls and modifying key processes to allow for the implementation of ASU 2016-02, which we anticipate will have a material impact on our balance sheet, as we will be recording right-of-use assets and lease liabilities related to our operating leases, including our leases for office space. We do not anticipate that application of ASU 2016-02 will have a material impact on our statement of operations or cash flows.

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. REVENUE

We are not required to include disclosures related to remaining performance obligations because substantially all of our contracts with customers have an original expected duration of one year or less.


Disaggregation of Revenue

The following table presents a disaggregation of our revenue by major category for the three and nine months ended September 30, 2018 (in thousands):
Revenue category
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Transaction services
$
16,619

 
$
46,272

Data platform services
1,039

 
5,591

Advertising and other
1,693

 
4,925

Revenue
$
19,351

 
$
56,788







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 nine months ended September 30, 2018. We recognized revenue of $3.1 million during the nine months ended September 30, 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 or that we are obligated to issue as part of the consideration for our acquisition (the “CBG Acquisition”) of assets of China Branding Group Limited (“CBG”) in September 2016 (the “CBG Acquisition Warrants”) and warrants we issued as a result of an amendment to the Financing Agreement 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:
 
September 30,
 
December 31,
 
2018
 
2017
CBG Financing Warrants
 
 
 
Expected volatility
60.00
%
 
60.00
%
Risk-free interest rate
2.81
%
 
1.96
%
Expected remaining term (years)
1.98

 
2.73

CBG Acquisition Warrants
 
 
 
Expected volatility
60.00
%
 
60.00
%
Risk-free interest rate
2.94
%
 
2.25
%
Expected remaining term (years)
4.97

 
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, 2018, we estimated that one future equity financing event 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 CBG Financing Warrants and the 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):
Change in volatility
Increase
 
Decrease
CBG Financing Warrants
$
275

 
$
275

CBG Acquisition Warrants
805

 
865

 
 
 
 
Change in stock price
 
 
 
CBG Financing Warrants
$
245

 
$
245

CBG Acquisition Warrants
345

 
405




The following table presents the change in the liability balance associated with our liability-classified warrants (in thousands):
 
Nine Months Ended September 30,
 
Year Ended December 31,
 
2018
 
2017
Balance at beginning of period
$
89,169

 
$
25,030

Warrant exercises
(59,907
)
 

Increase (decrease) in fair value
(22,190
)
 
64,139

Balance at end of period
$
7,072

 
$
89,169




At January 1, 2018, our outstanding liability-classified warrants included warrants we issued in connection with our acquisition of all 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 with respect to 2,416,996 shares of our common stock exercised such warrants. Because the VDC Acquisition Warrants 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 Warrants and VDC Financing Warrants (which right became effective when the closing price of our common stock reached $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 cashless basis only, we issued a total of 2,236,915 and 1,385,396 shares of common stock to the holders of the VDC Acquisition Warrants and the VDC Financing Warrants, respectively, in settlement of such warrants without receiving any proceeds from the exercise 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 ending December 31, 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 nine months ended September 30, 2018 in the balance of the liability associated with the Earnout Payments (in thousands):
Balance at beginning of period
$
1,930

Payments
(1,000
)
Change in fair value of contingent consideration (included in Other loss)
50

Balance at end of period
$
980




On the Condensed Consolidated Balance Sheet, we included the liability for contingent consideration as a component of Accrued expense and other liabilities.


NOTE 5. RESTRICTED CASH

Regarding our restricted cash, $2.25 million relates to the Financing Agreement and secures our obligations under that agreement (see Note 17 for more information regarding this amount). 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):
 
September 30,
2018
 
December 31, 2017
Cash and cash equivalents
$
9,902

 
$
22,632

Restricted cash reported in current assets
11,655

 
11,670

Total cash, cash equivalents and restricted cash
$
21,557

 
$
34,302




NOTE 6. INVESTMENT IN UNCONSOLIDATED AFFILIATES

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, 2018, we owned approximately five percent of Sharecare’s issued stock and maintained representation on its Board of Directors.

During June 2018, one of our consolidated VIEs acquired a 20% interest in Beijing All-in-one Cloud Net Technology, Co. Ltd. (“AIO”), a Chinese technology company which provides consulting and data services to the Chinese film industry, in exchange for $1.0 million, a portion of which was paid by September 30, 2018, and a license to use our proprietary KanKan data intelligence platform in China. Based on our evaluation of the facts and circumstances related to the transaction, we determined that we will account for such transaction using the equity method of accounting. We will recognize our equity in the net earnings or losses relating to AIO on a one-quarter reporting lag in our Consolidated Statements of Operations and Comprehensive Income (Loss). For the three months ended September 30, 2018, the amount of our equity in AIO’s net earnings for their quarter ended June 30, 2018 was not material.





NOTE 7. PREPAID EXPENSE AND OTHER CURRENT ASSETS

The following table presents the components of prepaid expense and other current assets (in thousands):
 
September 30, 2018
 
December 31, 2017
Prepaid expense
$
2,918

 
$
2,036

Deposits
3,487

 
1,960

Inventory, net
744

 
234

Other current assets
1,561

 
1,288

Total
$
8,710

 
$
5,518

 
 
 
 



NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands, except estimated lives):
 
Estimated Life
(Years)
 
September 30,
2018
 
December 31, 2017
Vehicles
5
 
$
1,350

 
$
447

Computers and equipment
2 - 12
 
1,978

 
1,635

Furniture and fixtures
2 - 9
 
221

 
220

Software
3 - 5
 
21,719

 
20,773

Software development in progress
 
 
2,010

 
1,935

Leasehold improvements
1 - 10
 
569

 
328

Total property, equipment and software
 
 
$
27,847

 
$
25,338

Less accumulated depreciation
 
 
(16,217
)
 
(11,951
)
Total property, equipment and software, net
 
 
$
11,630

 
$
13,387




For the nine months ended September 30, 2018 and 2017, depreciation (and amortization of software) expense was $4.4 million and $4.1 million, respectively.





NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes intangible assets by category (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Gross Amount
 
Accumulated
Amortization
 
Net Amount
 
Gross Amount
 
Accumulated
Amortization
 
Net Amount
Finite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Domain names
$
2,000

 
$
(1,358
)
 
$
642

 
$
2,591

 
$
(1,663
)
 
$
928

Customer relationships
23,186

 
(13,509
)
 
9,677

 
23,486

 
(10,539
)
 
12,947

Media content and broadcast rights
2,485

 
(1,309
)
 
1,176

 
2,485

 
(936
)
 
1,549

Acquired technology
578

 
(527
)
 
51

 
578

 
(461
)
 
117

Other intangible assets
68

 
(68
)
 

 
68

 
(68
)
 

 
$
28,317

 
$
(16,771
)
 
$
11,546

 
$
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
128

 

 
128

 
129

 

 
129

Total intangible assets
$
36,721

 

 
$
19,950

 
$
37,613

 

 
$
23,946




Total amortization expense was $3.8 million and $4.1 million for the nine months ended September 30, 2018 and 2017, respectively.

The following table summarizes the changes in goodwill during the nine months ended September 30, 2018 and the year ended December 31, 2017 (in thousands):
 
Nine Months Ended September 30, 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

 

 

 

 
16

 
16

Balance at end of period
$
18,514

 
$
1,585

 
$
20,099

 
$
18,514

 
$
1,585

 
$
20,099







The amount in the table above related to business acquisitions in the year ended December 31, 2017 represents measurement-period adjustments related to the CBG Acquisition.


NOTE 10. INCOME TAX

Our effective tax rate (“ETR”) from continuing operations was 9.1% for the nine months ended September 30, 2018. The quarterly ETR has not significantly differed from our historical annual ETR. The ETR primarily results from recording a benefit associated with a partial valuation allowance release during 2018. The release was affected by the Tax Act, as described below, which changed the carryforward period of net operating losses for U.S. federal tax purposes from 20 years to an indefinite period.

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 the U.S. federal corporate tax rate.

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 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 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.


Other Debt

The following table presents long-term debt (in thousands) as of:
 
September 30, 2018
 
December 31, 2017
Loan due September 2020
$
35,500

 
$
35,500

Unamortized original issue discount
(1,660
)
 
(836
)
Unamortized debt issuance cost
(21
)
 
(79
)
Carrying value of Loan
33,819

 
34,585

Exit fee payable in relation to Loan
3,500

 
3,500

Total long-term debt
$
37,319

 
$
38,085

Less: current portion
(37,319
)
 
(38,085
)
Long-term debt, less current portion and net of debt issuance cost
$

 
$




On September 24, 2015, we entered into the Financing Agreement, pursuant to which the Lenders provided us with the $27.5 million Loan. We entered into Amendment No. 1 to Financing Agreement 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. As of September 30, 2018, after amendments and other events described below, the Loan bore interest at three-month LIBOR (with a floor of 1%) plus 11% per annum, payable monthly, and had a maturity date of September 30, 2020. As of September 30, 2018, the applicable interest rate on the Loan was approximately 13% per annum.

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.

On April 30, 2018, we entered into Amendment No. 4 and Waiver to Financing Agreement (the “Fourth Financing Amendment”), which provided for, among other things, (i) a reduction in the interest rate on the remaining amount outstanding under the Financing Agreement to 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 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 of certain events of default under the Financing Agreement and (vi) prepayment by the Borrowers of $8.0 million principal amount outstanding and $3.5 million of exit fees under the Financing Agreement 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.

Effective as of June 29, 2018, we entered into Amendment No. 5 and Waiver to Financing Agreement (the “Fifth Financing Amendment”) pursuant to which the Lenders agreed, among other things, to extend the due date of the prepayments required by the Fourth Financing Amendment for up to three months, provided that we made extension payments on the first business day of each such month. The extension payments were $250,000 for each of the first two months and $500,000 for the third month, with the final extension period ending on September 28, 2018. We made the extension payments required by the Fifth Financing Amendment to extend the due date of the prepayments required by the Fourth Financing Amendment to September 28, 2018; however, we failed to prepay the $8.0 million principal amount and $3.5 million of exit fees due on such date. Such failure to make the required payments constitutes an event of default under the Financing Agreement and as a result, from September 28, 2018, the Loan bore interest at three-month LIBOR plus 11.0%, the default interest rate.

The Financing Agreement also 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). As of September 30, 2018, we were not in compliance with the covenant under the Financing Agreement requiring minimum revenue from our KanKan business during the trailing nine-month period ended September 30, 2018 of $12.6 million, as actual revenue from our KanKan business during such period was $5.6 million. Our non-compliance with such covenant constitutes an event of default under the Financing Agreement.

As a result of our events of default under the Financing Agreement, the Lenders may declare our obligations under the Financing Agreement, including all unpaid principal and interest, due and payable immediately and exercise such other rights available to them under the Financing Agreement, which could have a material adverse effect on our financial condition. We



have classified the debt as current in the accompanying balance sheet. See Note 17 for more information regarding subsequent events relating to the Financing Agreement.


NOTE 12. OTHER LIABILITIES

The following table presents the components of other liabilities (in thousands):
 
September 30, 2018
 
December 31, 2017
Deferred rent
$
1,650

 
$
1,820

Early lease termination liability
1,242

 

Contingent consideration liability, net of current portion

 
940

Deferred tax liability, net
369

 
741

Other
35

 

Total
$
3,296

 
$
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):
 
Nine Months Ended September 30,
 
2018
Balance at beginning of period
$

Establishment of early lease termination liability
2,295

Payment of rent and other costs
(798
)
Receipt of amounts due under subleases
95

Other
16

Balance at end of period
$
1,608




NOTE 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 Payment related to the VDC Acquisition.


NOTE 14. STOCKHOLDERS' EQUITY AND NET LOSS PER SHARE

Equity Issuances

On July 2, 2018, we entered into the 2018 Aspire Purchase Agreement with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Aspire Capital to purchase up to an aggregate of $30.0 million of shares of our common stock over the 30-month term of the 2018 Aspire Purchase Agreement.



The 2018 Aspire Purchase Agreement replaced the 2016 Aspire Purchase Agreement, which was terminated under the terms of the 2018 Aspire Purchase Agreement.

Under the 2018 Aspire Purchase Agreement, on any trading day over the 30-month term of such agreement, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”) directing Aspire Capital to purchase up to 50,000 shares of our common stock per business day, up to an aggregate of $30.0 million under the 2018 Aspire Purchase Agreement, at a per share price (the “Purchase Price”) equal to the lesser of (i) the lowest sale price of our common stock on the purchase date or (ii) the arithmetic average of the three lowest closing sale prices for our common stock during the 10 consecutive trading days ending on the trading day immediately preceding the purchase date.

The aggregate purchase price payable by Aspire Capital on any one purchase date may not exceed $250,000, unless otherwise mutually agreed. The parties may mutually agree to increase the number of shares of our common stock that may be purchased per trading day pursuant to the terms of the 2018 Aspire Purchase Agreement to 3,000,000 shares.

In addition, on any trading day on which we submit a Purchase Notice to Aspire Capital to purchase at least 50,000 shares, we also have the right, in our sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of our common stock equal to up to 30% of the aggregate shares of our common stock traded on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares we may determine, and a minimum purchase price threshold equal to the greater of (i) 80% of the closing price of our common stock on the business day immediately preceding the VWAP Purchase Date or (ii) a higher price that may be determined by us. The purchase price per share pursuant to such VWAP Purchase Notice will be equal to the lesser of (i) the closing sale price of our common stock on the VWAP Purchase Date, or (ii) 97% of the volume-weighted average price for our common stock traded on its principal market on the VWAP Purchase Date, subject to certain exceptions.

We may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.

In addition, Aspire Capital will not be required to buy any shares of our common stock pursuant to a Purchase Notice that is received by Aspire Capital on any trading day on which the last closing trade price of our common stock is below $1.00. There are no trading volume requirements or restrictions under the 2018 Aspire Purchase Agreement, and we will control the timing and amount of sales of our common stock to Aspire Capital. Aspire Capital has no right to require any sales by us, but is obligated to make purchases from us as directed by us in accordance with the 2018 Aspire Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the 2018 Aspire Purchase Agreement. The 2018 Aspire Purchase Agreement may be terminated by us at any time, at our discretion, without any cost to us. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates will engage in any direct or indirect short-selling or hedging our common stock during any time prior to the termination of the 2018 Aspire Purchase Agreement.

The 2018 Aspire Purchase Agreement provides that the total number of shares that may be issued pursuant to such agreement is limited to 6,629,039 shares (the “2018 Aspire Exchange Cap”), or 19.99% of our shares of common stock outstanding as of the date of the 2018 Aspire Purchase Agreement, unless stockholder approval is obtained in accordance with the rules of the Nasdaq Stock Market. If stockholder approval is not obtained, such limitation will not apply after the 2018 Aspire Exchange Cap is reached if at all times thereafter the average purchase price paid for all shares issued under the 2018 Aspire Purchase Agreement is equal to or greater than $3.91 per share. The 2018 Aspire Purchase Agreement also provides that at no time will Aspire Capital (together with its affiliates) beneficially own more than 19.99% of our outstanding shares of common stock.

As of September 30, 2018, we have issued to Aspire Capital a total of 3,308,812 shares of our common stock under the 2018 Aspire Purchase Agreement, including 3,095,238 shares purchased by Aspire Capital for an aggregate purchase price of $10.0 million, and 213,574 shares issued to Aspire Capital upon executing the 2018 Aspire Purchase Agreement. During the nine months ended September 30, 2018, we also issued 381,445 shares of our common stock as a result of stock option exercises, from which we obtained approximately $1.0 million as well as the shares of our common stock in settlement of the warrants as described in Note 4.

During the nine months ended September 30, 2017, we issued a total of 3,052,897 shares of our common stock to investors in exchange for approximately $8.3 million in cash, including a $5.0 million issuance to Aspire. We did not issue our common stock in private sales during the nine months ended September 30, 2018.





Stock-Based Compensation 

We are authorized to issue equity-based awards under our 2010 Equity Incentive Plan, our 2014 Incentive Plan, and our 2017 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 and China Cash Bonuses generally expire 10 years from the grant date. All forms of equity awards and China Cash Bonuses 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 activity under our equity incentive plans related to equity-classified stock option grants as of September 30, 2018, and changes during the nine 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
1,909,500

 
6.79

 
 
 
 
Exercised
(385,820
)
 
2.60

 
 
 
 
Forfeited, cancelled or expired
(46,377
)
 
6.09

 
 
 
 
Outstanding at September 30, 2018
10,874,359

 
$
4.36

 
7.8
 
$
2,885

Options exercisable at September 30, 2018
10,009,767

 
$
4.44

 
7.7
 
$
2,319




We granted an option to purchase 1.3 million shares of our common stock at an exercise price of $7.81 per 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 in January 2018 because Mr. Tao fully vested in the award at the time we received stockholder approval.




The following table summarizes activity under our equity incentive plans related to the China Cash Bonuses as of September 30, 2018, and changes during the nine 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
266,500

 
$
3.84

 
 
 
 
Granted
1,367,375

 
6.02

 
 
 
 
Exercised
(7,875
)
 
4.28

 
 
 
 
Forfeited, cancelled or expired
(233,375
)
 
5.76

 
 
 
 
Outstanding at September 30, 2018
1,392,625

 
$
5.67

 
9.3
 
$
36

Bonuses exercisable at September 30, 2018
169,750

 
$
4.04

 
8.2
 
$
19




During the nine months ended September 30, 2018, we did not award restricted stock under our equity incentive plans.

We incurred share-based compensation expense of $0.9 million and $1.6 million, respectively, during the three months ended September 30, 2018 and 2017, and of $12.9 million and $2.2 million, respectively, during the nine months ended September 30, 2018 and 2017.


Net Income (Loss) per Share 
 
For the three and nine months ended September 30, 2018 and 2017, 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 for the three and nine months ended September 30, 2018 and 2017 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 3,070,638 shares of our common stock at an exercise price of $4.78 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.


NOTE 15. SEGMENT INFORMATION

We 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 data collected and processed by our proprietary data intelligence software.

Our chief operating decision makers use Adjusted EBITDA as the primary measure of profitability for evaluating the operational performance of our reportable segments. Adjusted EBITDA represents operating income (loss) plus depreciation and amortization expense, share-based compensation expense, impairments and net other income, less other loss. For our Travel



& 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 Corporate Entity and Other.

The following table presents certain financial information regarding our business segments and other entities for the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Travel & Entertainment
 
Technology & Data Intelligence
 
Corporate Entity and Other
 
Consolidated
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
Revenue
$
17,596

 
$
1,039

 
$
716

 
$
19,351

Adjusted EBITDA
$
2,324

 
$
(1,674
)
 
$
(3,428
)
 
$
(2,778
)
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
Revenue
$
16,284

 
$
2,203

 
$
962

 
$
19,449

Adjusted EBITDA
$
1,955

 
$
(946
)
 
$
(2,833
)
 
$
(1,824
)
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
Revenue
$
49,320

 
$
5,591

 
$
1,877

 
$
56,788

Adjusted EBITDA
$
4,493

 
$
(5,166
)
 
$
(12,292
)
 
$
(12,965
)
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
Revenue
$
45,765

 
$
3,212

 
$
3,027

 
$
52,004

Adjusted EBITDA
$
4,322

 
$
(2,096
)
 
$
(7,788
)
 
$
(5,562
)
 
 
 
 
 
 
 
 





The following table reconciles Adjusted EBITDA to Loss before income taxes (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Adjusted EBITDA
$
(2,778
)
 
$
(1,824
)
 
$
(12,965
)
 
$
(5,562
)
Depreciation and amortization
(2,756
)
 
(2,482
)
 
(8,220
)
 
(8,237
)
Impairments

 
(28
)
 

 
(28
)
Share-based compensation expense
(891
)
 
(1,629
)
 
(12,913
)
 
(2,225
)
Other loss
(1
)
 

 
(56
)
 
(20
)
Other loss (gain)
12

 
33

 
(511
)
 
85

Operating loss
$
(6,414
)

$
(5,930
)

$
(34,665
)

$
(15,987
)
Other income (expense)
 
 
 
 
 
 
 
Interest expense
(1,307
)
 
(1,080
)
 
(3,968
)
 
(3,279
)
Other income
1

 

 
56

 
20

Change in fair value of warrant liability
3,525

 
(5,978
)
 
22,190

 
2,351

Other gain (loss)
(12
)
 
(33
)
 
511

 
(85
)
Total other income, net
$
2,207


$
(7,091
)

$
18,789


$
(993
)
Income (loss) before income taxes
$
(4,207
)

$
(13,021
)

$
(15,876
)

$
(16,980
)


The following table presents total assets for our segments and the corporate and other entities (in thousands):
 
September 30,
2018
 
December 31, 2017
Travel & Entertainment segment
$
69,296

 
$
75,820

Technology & Data Intelligence segment
3,824

 
5,105

Corporate entity and other business units
17,329

 
22,612

Consolidated
$
90,449

 
$
103,537



Capital expenditures for our Travel & Entertainment segment totaled $0.3 million and $0.7 million during the three months ended September 30, 2018 and 2017, respectively, while capital expenditures for our Technology & Data Intelligence segment totaled $0.1 million and $0.2 million during each of the same periods, respectively. Capital expenditures for our Travel & Entertainment segment totaled $2.0 million and $1.6 million during the nine months ended September 30, 2018 and 2017, respectively, while capital expenditures for our Technology & Data Intelligence segment totaled $0.6 million and $1.0 million during each of the same periods, respectively.


NOTE 16. RELATED PARTY TRANSACTION

On June 11, 2018, we sold the IRS.com web domain to a company in which our former CFO has a significant ownership interest. The consideration consisted of a cash payment of approximately $0.6 million and assumed liabilities of approximately $0.1 million. We recognized a gain of approximately $0.6 million on the transaction which is reported in Other gain (loss) on our Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).





NOTE 17. SUBSEQUENT EVENTS

Events Related to the Financing Agreement

On October 4, 2018, $2.25 million held in a cash collateral account to secure our obligations under the Financing Agreement (such amount reflected in Restricted cash in our consolidated balance sheet) was transferred to the Lenders and applied to the amount of exit fees due and payable under the Financing Agreement. The Financing Agreement requires us to maintain a balance in that account of at least $2.25 million and we have not replaced that amount transferred to Lenders, which constitutes an event of default under the Financing Agreement.

We are actively engaged in discussions with the Lenders regarding a resolution of the events of default under the Financing Agreement described herein. On October 16, 2018, in connection with those discussions, we agreed to increase the amount of the exit fees payable to the Lenders under the Financing Agreement by $1.0 million. Also in connection with those discussions, the Lenders have informed us that they are willing to forebear from taking any enforcement actions against us through December 31, 2018 if we continue to pursue certain strategic alternatives. We have engaged a financial advisor to assist us in assessing and pursuing those strategic alternatives, and we intend to continue pursuing those strategic alternatives and others, including the potential sale of certain non-core assets, investment assets and operating businesses, and to explore other alternatives for obtaining financing. We cannot provide any assurance that we will be successful in completing a strategic transaction or obtaining alternative financing, or that the Lenders will forebear from taking any enforcement actions against us.


Common Stock Issuance

On November 2, 2018, we sold 200,000 shares of our common stock to an accredited investor in a private placement for $0.5 million.



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read our discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 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 are primarily a technology-focused company, devoting a large and increasing portion of our resources towards growing our KanKan business, which we report as our Technology & Data Intelligence segment. The segment generates our data platform services revenue by developing and deploying artificial intelligence (“AI”) products and AI-based solutions for businesses in many industries and geographies, as well as by providing financial technology (“FinTech”) services. Though we currently focus our KanKan business on the Asia-Pacific region, we have initiated marketing activities in Europe and the United States and are launching several proof-of-concept projects.

We have been developing AI-based vision products, computing devices and software-as-a-service products that we are deploying in the retail, food-safety, construction-safety, and public-safety industries. We constantly improve our KanKan data and AI platform with advanced data, algorithms and training; our facial-recognition algorithms recently received top rankings in Labeled Faces in the Wild (hosted by the University of Massachusetts) and MegaFace (hosted by the University of Washington), two widely-recognized global facial-recognition testing platforms. Among the other work that we have ramped up during 2018, we continue partnering with top universities on research projects targeting algorithm, artificial neural network and computing architectures, which we believe keeps us among the leaders in technology development.

In our FinTech business, we are currently testing new products that comply with the strict regulations recently imposed by the Chinese government during an extended shutdown of the lending market in China while the Chinese government conducted an industry-wide regulatory audit. We believe the new products, which we plan to launch in the near future, will serve the high demand for consumer loans in China.

We also own and operate Vegas.com, an online agency catering to the travel and entertainment needs of visitors to the Las Vegas area and those of Las Vegas locals. Our Travel & Entertainment segment generates transaction services revenue from sales of travel and entertainment products, such as show tickets and hotel rooms.

Various advertising mechanisms and other activity, such as online merchandise sales, also contribute to our consolidated revenue.

The following table presents our revenue categories as a percentage of total consolidated revenue during the three and nine months ended September 30, 2018.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017