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ITEM 1.
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FINANCIAL STATEMENTS
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REMARK HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
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September 30, 2018
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December 31, 2017
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(Unaudited)
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Assets
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Cash and cash equivalents
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$
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9,902
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$
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22,632
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Restricted cash
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11,655
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11,670
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Trade accounts receivable, net
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4,753
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3,673
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Prepaid expense and other current assets
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8,710
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5,518
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Notes receivable, current
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100
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290
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Total current assets
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35,120
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43,783
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Notes receivable
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—
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100
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Property and equipment, net
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11,630
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13,387
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Investment in unconsolidated affiliates
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2,030
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1,030
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Intangibles, net
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19,950
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23,946
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Goodwill
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20,099
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20,099
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Other long-term assets
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1,620
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1,192
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Total assets
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$
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90,449
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$
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103,537
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Liabilities and Stockholders’ Equity
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Accounts payable
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$
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23,956
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$
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17,857
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Accrued expense and other current liabilities
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12,034
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18,795
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Deferred merchant booking
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8,727
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9,027
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Contract liability
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5,049
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3,691
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Note payable
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3,000
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3,000
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Current maturities of long-term debt, net of unamortized discount and debt issuance cost
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37,319
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38,085
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Total current liabilities
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90,085
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90,455
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Warrant liability
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7,072
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89,169
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Other liabilities
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3,296
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3,501
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Total liabilities
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100,453
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183,125
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Commitments and contingencies (
Note 13
)
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Preferred stock, $0.001 par value; 1,000,000 shares authorized; none issued
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—
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—
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Common stock, $0.001 par value; 100,000,000 shares authorized; 36,468,696 and 28,406,026 shares issued and outstanding; each at September 30, 2018 and December 31, 2017, respectively
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36
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28
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Additional paid-in-capital
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304,006
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220,117
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Accumulated other comprehensive income
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48
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115
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Accumulated deficit
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(314,094
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)
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(299,848
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)
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Total stockholders’ deficit
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(10,004
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)
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(79,588
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)
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Total liabilities and stockholders’ deficit
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$
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90,449
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$
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103,537
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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)
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2018
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2017
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2018
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2017
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Revenue
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$
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19,351
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$
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19,449
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$
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56,788
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$
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52,004
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Cost and expense
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Cost of revenue (excluding depreciation and amortization)
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4,393
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5,641
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14,557
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12,270
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Sales and marketing
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7,213
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6,326
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20,884
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17,975
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Technology and development
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842
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865
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2,587
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2,657
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General and administrative
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10,444
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9,971
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44,941
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26,656
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Depreciation and amortization
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2,756
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2,482
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8,220
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8,237
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Impairments
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—
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28
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—
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28
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Other operating expense
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117
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66
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264
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168
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Total cost and expense
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25,765
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25,379
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91,453
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67,991
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Operating loss
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(6,414
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)
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(5,930
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)
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(34,665
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)
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(15,987
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)
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Other income (expense)
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Interest expense
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(1,307
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)
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(1,080
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)
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(3,968
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)
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(3,279
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)
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Other income, net
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1
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—
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56
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20
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Change in fair value of warrant liability
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3,525
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(5,978
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)
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22,190
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2,351
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Other gain (loss)
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(12
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)
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(33
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)
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511
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(85
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)
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Total other income (expense), net
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2,207
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(7,091
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)
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18,789
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(993
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)
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Loss before income taxes
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(4,207
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)
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(13,021
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)
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(15,876
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)
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(16,980
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)
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Benefit from (provision for) income taxes
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442
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(229
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)
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1,437
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(603
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)
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Net loss
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$
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(3,765
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)
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$
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(13,250
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)
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$
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(14,439
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)
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$
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(17,583
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)
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Other comprehensive income (loss)
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Foreign currency translation adjustments
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(82
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)
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48
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(67
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)
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20
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Comprehensive loss
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$
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(3,847
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)
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$
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(13,202
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)
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$
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(14,506
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)
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$
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(17,563
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)
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Weighted-average shares outstanding, basic and diluted
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35,463
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22,811
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33,608
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22,744
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Net loss per share, basic and diluted
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$
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(0.11
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)
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$
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(0.58
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)
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$
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(0.43
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)
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$
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(0.77
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)
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See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
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Nine Months Ended September 30,
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2018
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2017
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Net cash provided by (used in) operating activities
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$
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(18,691
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)
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$
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616
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Cash flows from investing activities:
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Proceeds from disposition of assets
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629
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—
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Purchases of property, equipment and software
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(2,728
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)
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(2,631
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)
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Acquisition of unconsolidated affiliate
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(480
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)
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(29
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)
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Net cash used in investing activities
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(2,579
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)
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(2,660
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)
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Cash flows from financing activities:
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Proceeds from issuance of common stock, net
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10,951
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8,315
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Proceeds from debt issuance
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—
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3,000
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Payment of loan fees and debt issuance cost
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(1,526
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)
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—
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Payment of contingent consideration in business acquisitions
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(900
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)
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—
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Payments of capital lease obligations
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—
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(179
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)
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Net cash provided by financing activities
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8,525
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11,136
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Net change in cash, cash equivalents and restricted cash
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(12,745
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)
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9,092
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Cash, cash equivalents and restricted cash:
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Beginning of period
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34,302
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18,548
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End of period
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$
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21,557
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$
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27,640
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Supplemental cash flow information:
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Cash paid for interest
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$
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3,426
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$
|
3,031
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Supplemental schedule of non-cash investing and financing activities:
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Issuance of common stock upon warrant exercise
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$
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59,907
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$
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—
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Issuance of common stock upon conversion of debt instruments
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$
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—
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$
|
121
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Common stock subscription payable
|
$
|
520
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$
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—
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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:
|
|
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|
•
|
monetize existing assets
|
|
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|
•
|
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
.
Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Three Months Ended September 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
Dollars
|
|
Percentage
|
|
Revenue
|
|
$
|
19,351
|
|
|
$
|
19,449
|
|
|
$
|
(98
|
)
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
4,393
|
|
|
5,641
|
|
|
(1,248
|
)
|
|
(22
|
)%
|
|
Sales and marketing
|
|
7,213
|
|
|
6,326
|
|
|
887
|
|
|
14
|
%
|
|
Technology and development
|
|
842
|
|
|
865
|
|
|
(23
|
)
|
|
(3
|
)%
|
|
General and administrative
|
|
10,444
|
|
|
9,971
|
|
|
473
|
|
|
5
|
%
|
|
Depreciation and amortization
|
|
2,756
|
|
|
2,482
|
|
|
274
|
|
|
11
|
%
|
|
Other operating expense
|
|
117
|
|
|
66
|
|
|
51
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(1,307
|
)
|
|
(1,080
|
)
|
|
(227
|
)
|
|
21
|
%
|
|
Other income (expense)
|
|
1
|
|
|
—
|
|
|
1
|
|
|
|
|
Change in FV of warrant liability
|
|
3,525
|
|
|
(5,978
|
)
|
|
9,503
|
|
|
(159
|
)%
|
|
Other gain (loss)
|
|
(12
|
)
|
|
(33
|
)
|
|
21
|
|
|
(64
|
)%
|
|
Provision for (benefit from) income taxes
|
|
442
|
|
|
(229
|
)
|
|
671
|
|
|
(293
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Nine Months Ended September 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
Dollars
|
|
Percentage
|
|
Revenue
|
|
$
|
56,788
|
|
|
$
|
52,004
|
|
|
$
|
4,784
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
14,557
|
|
|
12,270
|
|
|
2,287
|
|
|
19
|
%
|
|
Sales and marketing
|
|
20,884
|
|
|
17,975
|
|
|
2,909
|
|
|
16
|
%
|
|
Technology and development
|
|
2,587
|
|
|
2,657
|
|
|
(70
|
)
|
|
(3
|
)%
|
|
General and administrative
|
|
44,941
|
|
|
26,656
|
|
|
18,285
|
|
|
69
|
%
|
|
Depreciation and amortization
|
|
8,220
|
|
|
8,237
|
|
|
(17
|
)
|
|
—
|
%
|
|
Other operating expense
|
|
264
|
|
|
168
|
|
|
96
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(3,968
|
)
|
|
(3,279
|
)
|
|
(689
|
)
|
|
21
|
%
|
|
Other income (expense)
|
|
56
|
|
|
20
|
|
|
36
|
|
|
180
|
%
|
|
Change in FV of warrant liability
|
|
22,190
|
|
|
2,351
|
|
|
19,839
|
|
|
844
|
%
|
|
Other gain (loss)
|
|
511
|
|
|
(85
|
)
|
|
596
|
|
|
(701
|
)%
|
|
Provision for (benefit from) income taxes
|
|
1,437
|
|
|
(603
|
)
|
|
2,040
|
|
|
(338
|
)%
|
Consolidated results of operations were primarily impacted by the results of operations of our reportable segments, as described above.
Revenue.
The revenue reported by our Remark Entertainment business (formerly referred to as our Fanstang business) decreased during the
nine months ended
September 30, 2018
by approximately $0.9 million primarily due to contracts for live broadcast events and sponsorships that expired in the prior year and have not been renewed.
General and administrative.
The decrease in general and administrative expense incurred by our non-reportable-segment businesses in the third quarter of 2018 from the corresponding 2017 period was affected by the following:
|
|
|
|
•
|
A decrease of approximately $0.9 million in share-based compensation expense resulted because the prior-year period included significantly more stock options with early vesting.
|
|
|
|
|
•
|
Our increased use of consultants for certain new strategic and administrative projects, primarily one to enhance the robustness of our global Sarbanes-Oxley compliance program, added approximately $0.4 million more than in the same period of the prior year.
|
The increase in general and administrative expense incurred by our non-reportable-segment businesses in the first
nine
months of 2018 from the corresponding 2017 period was affected by the following:
|
|
|
|
•
|
In January 2018, we immediately recognized $11.6 million of stock-based compensation expense related to a grant of an option to purchase 1.3 million shares of our common stock at an exercise price of $7.81 per share to our Chief Executive Officer. The effect of that single award was partially offset by differences in the amount and timing of stock option grants to other employees, resulting in a net increase of $10.3 million in stock-based compensation expense.
|
|
|
|
|
•
|
An increase in rent expense of approximately $1.9 million which resulted from our recording of a liability associated with the early abandonment of a lease for office space in March 2018. No similar transactions occurred during the same period of the prior year.
|
|
|
|
|
•
|
Our increased use of consultants for certain new strategic and administrative projects, primarily one to enhance the rigor of our global Sarbanes-Oxley compliance program, added approximately $1.2 million more than in the same period of the prior year.
|
|
|
|
|
•
|
Legal expense increased approximately $0.4 million, primarily as a result of litigation work related to the CBG Acquisition and contract review and translation services related to the increased number of contracts related to our business in China.
|
|
|
|
|
•
|
Individually immaterial increases in other expense categories that contributed to the remaining increase.
|
Interest expense.
The increase in interest expense was the result of amortization of discount on our debt. We accounted for the amendments to the Financing Agreement executed since October 2017 as debt modifications, adding $2.5 million to the amount of discount on our debt in the form of additional fees.
Change in fair value of warrant liability.
The fair value of our warrant liability maintains a direct relationship with the price of our common stock, such that the significant decrease in our common stock price between December 31, 2017 and
September 30, 2018
resulted in a corresponding decrease in the fair value of our warrant liability. The decrease in our common stock price was much larger than the decrease in our common stock price between December 31, 2016 and September 30, 2017 and, as a result, the amount of decrease in the warrant liability was much larger than during the same period of 2017. The same relationship between our common stock price and the estimated fair value of the warrants was the primary cause of the decrease in the fair value of our warrant liability during the third quarter of 2018, compared to an increase in the fair value of our warrant liability during the third quarter of 2017.
Other gain (loss).
During June 2018, we disposed of the IRS.com domain, resulting in a $0.6 million gain on disposal.
LIQUIDITY AND CAPITAL RESOURCES
Overview
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
.
We are a party to the Financing Agreement, pursuant to which the Lenders have extended credit to the Borrowers consisting of the Loan in the aggregate principal amount of $35.5 million. As of
September 30, 2018
, 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. The material terms of the Financing Agreement, the amendments thereto, and related documents effective as of
September 30, 2018
are described in
Note 11
. As of
September 30, 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.
Pursuant to the Fourth Financing Amendment dated as of April 30, 2018, the Borrowers agreed to make a prepayment 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. Pursuant to the Fifth Financing Amendment dated as of June 29, 2018, the Lenders agreed, among other things, to extend the due date of the prepayments and fees 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 payment date to September 28, 2018; however, we did not make the payments required on such date, which constitutes an event of default under the Financing Agreement. As a result of the default, 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.
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.
On October 16, 2018, in connection with our discussions with Lenders regarding a resolution of the events of default under the Financing Agreement described herein, we agreed to increase the amount of the exit fees payable to the Lenders under the Financing Agreement by $1.0 million.
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. We are actively engaged in discussions with the Lenders regarding a resolution of the events of default under the Financing Agreement. In connection with those discussions, the Lenders have informed us that they are willing to forebear from taking any enforcement actions against us for a specified period 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.
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, 2019, 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 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.
Pursuant to the terms of the purchase agreement we entered into in connection with the VDC Acquisition, we are obligated to make an Earnout Payment based upon the performance of Vegas.com in the year ended December 31, 2018. We expect that the performance of Vegas.com during the year ended December 31, 2018 will trigger the maximum Earnout Payment of $1.0 million, which will be due in the second quarter of 2019.
On November 9, 2016, we entered into the 2016 Aspire Purchase Agreement with Aspire Capital, which provided that, upon the terms and subject to the conditions and limitations set forth therein, we had the right to direct Aspire Capital to purchase up to an aggregate of $20.0 million of shares of our common stock over the 30-month term of the 2016 Aspire Purchase Agreement. Purchases under the 2016 Aspire Purchase Agreement were made at prices calculated in accordance with the terms of the 2016 Aspire Purchase Agreement at the time of our submission to Aspire Capital of a purchase notice specifying such number of shares to be purchased, subject to maximum dollar and share amounts for sales on any one date unless the parties mutually agreed otherwise. Additionally, the total number of shares issuable pursuant to the 2016 Aspire Purchase Agreement was limited to 4,273,411 shares (the “2016 Aspire Exchange Cap”), or 19.99% of our shares of common stock outstanding as of the date of the 2016 Aspire Purchase Agreement, unless stockholder approval was obtained in accordance with the rules of the Nasdaq Stock Market. If stockholder approval was not obtained, such limitation would not apply after the 2016 Aspire Exchange Cap was reached if at all times thereafter the average purchase price paid for all shares issued under the 2016 Aspire Purchase Agreement was equal to or greater than $3.96 per share. As of the termination of the 2016 Aspire Purchase Agreement effective July 2, 2018, we had issued the maximum number of shares issuable within the 2016 Aspire Exchange Cap, including 4,121,896 shares purchased by Aspire Capital for an aggregate purchase price of $12.8 million and 151,515 shares issued to Aspire Capital upon executing the 2016 Aspire Purchase Agreement. As of July 2, 2018, we had not obtained stockholder approval and we were able to make subsequent issuances under the 2016 Aspire Purchase Agreement only if and to the extent that following such issuance the average purchase price paid was equal to or greater than $3.96 per share.
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. Purchases under the 2018 Aspire Purchase Agreement, which is described in more detail in
Note 14
, are made at prices calculated in accordance with the terms of the 2018 Aspire Purchase Agreement at the time of our submission to Aspire Capital of a purchase notice specifying such number of shares to be purchased, subject to maximum dollar and share amounts for sales on any one date unless the parties mutually agree otherwise. Additionally, the total number of shares that may be issued pursuant to the 2018 Aspire Purchase Agreement is limited to the 2018 Aspire Exchange Cap, which represents 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. 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. As of September 30, 2018, we had not obtained stockholder approval and we were able to issue to Aspire Capital up to a maximum of 3,320,227 additional shares under the 2018 Aspire Purchase Agreement, unless and to the extent that following such issuance the average purchase price paid was equal to or greater than $3.91 per share.
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 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 2018 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
During the
nine months ended
September 30, 2018
, we used
$19.3 million
more cash in operating activities than we did during the
nine months ended
September 30, 2017
. The increase in cash used in operating activities is a result of an increase in operating losses, including the increase in our operations in China (which included increasing payroll costs); paying security deposits related to our travel and entertainment business; increasing the use of consultants for certain new strategic and administrative projects (primarily one to enhance the rigor of our global Sarbanes-Oxley compliance program) and the timing of payments related to elements of working capital.
Cash Flows - Investing Activities
During the
nine months ended
September 30, 2018
, we received approximately $0.6 million upon the disposition of the IRS.com domain name in June 2018. The proceeds from such asset disposition were almost entirely offset by our payment of $0.5 million towards our investment in AIO (see
Note 6
for more details).
Cash Flows - Financing Activities
During the
nine months ended
September 30, 2018
, our financing activities provided $2.6 million more from the issuance of shares of our common stock, including from stock option exercises, than during the same period of 2017. The additional amount from common stock issuances, however, was offset by our payment in the current year of approximately $1.5 million in loan fees related to our debt modifications, $0.9 million of our payment of the Earnout Payment due in 2018 and the fact that the prior year period included $3.0 million of proceeds from our issuance of a note payable.
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.