|
|
|
|
ITEM 1.
|
FINANCIAL STATEMENTS
|
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,071
|
|
|
$
|
1,410
|
|
|
Trade accounts receivable, net
|
4,700
|
|
|
5,762
|
|
|
Prepaid expense and other current assets
|
7,213
|
|
|
7,907
|
|
|
Notes receivable, current
|
—
|
|
|
100
|
|
|
Assets of disposal group, current
|
—
|
|
|
28,966
|
|
|
Total current assets
|
13,984
|
|
|
44,145
|
|
|
Property and equipment, net
|
1,795
|
|
|
2,075
|
|
|
Operating lease assets
|
5,582
|
|
|
—
|
|
|
Investment in unconsolidated affiliates
|
1,944
|
|
|
2,005
|
|
|
Intangibles, net
|
838
|
|
|
1,010
|
|
|
Other long-term assets
|
1,308
|
|
|
450
|
|
|
Assets of disposal group, long-term
|
—
|
|
|
44,123
|
|
|
Total assets
|
$
|
25,451
|
|
|
$
|
93,808
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
Accounts payable
|
$
|
7,696
|
|
|
$
|
5,675
|
|
|
Accrued expense and other current liabilities
|
13,625
|
|
|
16,812
|
|
|
Contract liability
|
222
|
|
|
132
|
|
|
Note payable
|
3,000
|
|
|
3,000
|
|
|
Loans payable, current, net of unamortized discount and debt issuance cost
|
11,248
|
|
|
35,314
|
|
|
Liabilities of disposal group, current
|
—
|
|
|
41,648
|
|
|
Total current liabilities
|
35,791
|
|
|
102,581
|
|
|
Operating lease liabilities, long-term
|
5,838
|
|
|
—
|
|
|
Warrant liability
|
721
|
|
|
1,383
|
|
|
Other liabilities
|
—
|
|
|
2,934
|
|
|
Liabilities of disposal group, long-term
|
—
|
|
|
34
|
|
|
Total liabilities
|
42,350
|
|
|
106,932
|
|
|
|
|
|
|
Commitments and contingencies (
Note 13
)
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 1,000,000 shares authorized; none issued
|
—
|
|
|
—
|
|
|
Common stock, $0.001 par value; 100,000,000 shares authorized; 46,130,159 and 39,053,312 shares issued and outstanding; each at June 30, 2019 and December 31, 2018, respectively
|
46
|
|
|
39
|
|
|
Additional paid-in-capital
|
315,829
|
|
|
308,018
|
|
|
Accumulated other comprehensive income
|
65
|
|
|
32
|
|
|
Accumulated deficit
|
(332,839
|
)
|
|
(321,213
|
)
|
|
Total stockholders’ deficit
|
(16,899
|
)
|
|
(13,124
|
)
|
|
Total liabilities and stockholders’ deficit
|
$
|
25,451
|
|
|
$
|
93,808
|
|
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenue
|
$
|
2,865
|
|
|
$
|
3,887
|
|
|
$
|
4,074
|
|
|
$
|
5,713
|
|
|
Cost and expense
|
|
|
|
|
|
|
|
|
Cost of revenue (excluding depreciation and amortization)
|
1,541
|
|
|
3,280
|
|
|
3,134
|
|
|
4,547
|
|
|
Sales and marketing
|
687
|
|
|
1,074
|
|
|
1,546
|
|
|
2,057
|
|
|
Technology and development
|
854
|
|
|
1,288
|
|
|
2,158
|
|
|
2,091
|
|
|
General and administrative
|
2,454
|
|
|
4,385
|
|
|
5,431
|
|
|
21,650
|
|
|
Depreciation and amortization
|
260
|
|
|
546
|
|
|
585
|
|
|
1,137
|
|
|
Other operating expense
|
—
|
|
|
24
|
|
|
6
|
|
|
46
|
|
|
Total cost and expense
|
5,796
|
|
|
10,597
|
|
|
12,860
|
|
|
31,528
|
|
|
Operating loss
|
(2,931
|
)
|
|
(6,710
|
)
|
|
(8,786
|
)
|
|
(25,815
|
)
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
(553
|
)
|
|
(330
|
)
|
|
(940
|
)
|
|
(672
|
)
|
|
Other income, net
|
92
|
|
|
43
|
|
|
47
|
|
|
44
|
|
|
Change in fair value of warrant liability
|
2,078
|
|
|
10,055
|
|
|
662
|
|
|
18,665
|
|
|
Other gain, net
|
27
|
|
|
554
|
|
|
1
|
|
|
523
|
|
|
Total other income (expense), net
|
1,644
|
|
|
10,322
|
|
|
(230
|
)
|
|
18,560
|
|
|
Income (loss) from continuing operations before income taxes
|
(1,287
|
)
|
|
3,612
|
|
|
(9,016
|
)
|
|
(7,255
|
)
|
|
Benefit from income taxes
|
—
|
|
|
1,026
|
|
|
—
|
|
|
995
|
|
|
Income (loss) from continuing operations
|
$
|
(1,287
|
)
|
|
$
|
4,638
|
|
|
$
|
(9,016
|
)
|
|
$
|
(6,260
|
)
|
Loss from discontinued operations, net of tax (
Note 16
)
|
(1,487
|
)
|
|
(1,259
|
)
|
|
(2,610
|
)
|
|
(4,414
|
)
|
|
Net income (loss)
|
$
|
(2,774
|
)
|
|
$
|
3,379
|
|
|
$
|
(11,626
|
)
|
|
$
|
(10,674
|
)
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
127
|
|
|
(183
|
)
|
|
33
|
|
|
15
|
|
|
Comprehensive income (loss)
|
$
|
(2,647
|
)
|
|
$
|
3,196
|
|
|
$
|
(11,593
|
)
|
|
$
|
(10,659
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, basic and diluted
|
43,335
|
|
|
32,933
|
|
|
39,994
|
|
|
32,666
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic and diluted
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.03
|
)
|
|
$
|
0.14
|
|
|
$
|
(0.23
|
)
|
|
$
|
(0.19
|
)
|
|
Discontinued operations
|
(0.03
|
)
|
|
(0.04
|
)
|
|
(0.07
|
)
|
|
(0.14
|
)
|
|
Consolidated
|
$
|
(0.06
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.30
|
)
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Deficit
(in thousands, except number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
Common Stock Shares
|
|
Common Stock Par Value
|
|
Additional Paid-In Capital
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Accumulated Deficit
|
|
Total
|
|
Balance at March 31, 2019
|
40,722,229
|
|
|
$
|
41
|
|
|
$
|
310,618
|
|
|
$
|
(62
|
)
|
|
$
|
(330,065
|
)
|
|
$
|
(19,468
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,774
|
)
|
|
(2,774
|
)
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
216
|
|
|
—
|
|
|
—
|
|
|
216
|
|
|
Common stock sales
|
5,407,930
|
|
|
5
|
|
|
4,995
|
|
|
—
|
|
|
—
|
|
|
5,000
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
127
|
|
|
—
|
|
|
127
|
|
|
Balance at June 30, 2019
|
46,130,159
|
|
|
$
|
46
|
|
|
$
|
315,829
|
|
|
$
|
65
|
|
|
$
|
(332,839
|
)
|
|
$
|
(16,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
Common Stock Shares
|
|
Common Stock Par Value
|
|
Additional Paid-In Capital
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Accumulated Deficit
|
|
Total
|
|
Balance at March 31, 2018
|
32,842,399
|
|
|
$
|
33
|
|
|
$
|
292,152
|
|
|
$
|
313
|
|
|
$
|
(313,708
|
)
|
|
$
|
(21,210
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,379
|
|
|
3,379
|
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
375
|
|
|
—
|
|
|
—
|
|
|
375
|
|
|
Equity instrument exercises
|
302,800
|
|
|
—
|
|
|
667
|
|
|
—
|
|
|
—
|
|
|
667
|
|
|
Other
|
—
|
|
|
—
|
|
|
(30
|
)
|
|
(183
|
)
|
|
—
|
|
|
(213
|
)
|
|
Balance at June 30, 2018
|
33,145,199
|
|
|
$
|
33
|
|
|
$
|
293,164
|
|
|
$
|
130
|
|
|
$
|
(310,329
|
)
|
|
$
|
(17,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
Common Stock Shares
|
|
Common Stock Par Value
|
|
Additional Paid-In Capital
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Accumulated Deficit
|
|
Total
|
|
Balance at December 31, 2018
|
39,053,312
|
|
|
$
|
39
|
|
|
$
|
308,018
|
|
|
$
|
32
|
|
|
$
|
(321,213
|
)
|
|
$
|
(13,124
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,626
|
)
|
|
(11,626
|
)
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
314
|
|
|
—
|
|
|
—
|
|
|
314
|
|
|
Common stock sales
|
7,074,597
|
|
|
7
|
|
|
7,493
|
|
|
—
|
|
|
—
|
|
|
7,500
|
|
|
Equity instrument exercises
|
2,250
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
33
|
|
|
—
|
|
|
33
|
|
|
Balance at June 30, 2019
|
46,130,159
|
|
|
$
|
46
|
|
|
$
|
315,829
|
|
|
$
|
65
|
|
|
$
|
(332,839
|
)
|
|
$
|
(16,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
Common Stock Shares
|
|
Common Stock Par Value
|
|
Additional Paid-In Capital
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Accumulated Deficit
|
|
Total
|
|
Balance at December 31, 2017
|
28,406,026
|
|
|
$
|
28
|
|
|
$
|
220,117
|
|
|
$
|
115
|
|
|
$
|
(299,848
|
)
|
|
$
|
(79,588
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,674
|
)
|
|
(10,674
|
)
|
|
Effect of adopting new revenue recognition policy
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
193
|
|
|
193
|
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
12,236
|
|
|
—
|
|
|
—
|
|
|
12,236
|
|
|
Equity instrument exercises
|
4,739,173
|
|
|
5
|
|
|
60,853
|
|
|
—
|
|
|
—
|
|
|
60,858
|
|
|
Reclassification of liability-classified stock-based compensation
|
—
|
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
|
Other
|
—
|
|
|
—
|
|
|
(30
|
)
|
|
15
|
|
|
—
|
|
|
(15
|
)
|
|
Balance at June 30, 2018
|
33,145,199
|
|
|
$
|
33
|
|
|
$
|
293,164
|
|
|
$
|
130
|
|
|
$
|
(310,329
|
)
|
|
$
|
(17,002
|
)
|
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
Net cash used in continuing operating activities
|
$
|
(7,496
|
)
|
|
$
|
(10,152
|
)
|
|
Net cash used in discontinued operating activities
|
(7,159
|
)
|
|
(4,095
|
)
|
|
Net cash used in operating activities
|
(14,655
|
)
|
|
(14,247
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
Proceeds from sale of business
|
30,000
|
|
|
—
|
|
|
Proceeds from disposition of assets
|
—
|
|
|
625
|
|
|
Purchases of property, equipment and software
|
(2
|
)
|
|
(370
|
)
|
|
Payment of payroll costs capitalized to software in progress
|
(127
|
)
|
|
(281
|
)
|
|
Acquisition of unconsolidated affiliate
|
—
|
|
|
(151
|
)
|
|
Net cash provided by (used in) continuing investing activities
|
29,871
|
|
|
(177
|
)
|
|
Net cash used in discontinued investing activities
|
(18,396
|
)
|
|
(1,643
|
)
|
|
Net cash provided by (used in) investing activities
|
11,475
|
|
|
(1,820
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from issuance of common stock, net
|
7,504
|
|
|
951
|
|
|
Payment of loan fees and debt issuance cost
|
(2,275
|
)
|
|
(522
|
)
|
|
Repayments of debt
|
(25,526
|
)
|
|
—
|
|
|
Net cash provided by (used in) financing activities
|
(20,297
|
)
|
|
429
|
|
|
Net change in cash, cash equivalents and restricted cash
|
(23,477
|
)
|
|
(15,638
|
)
|
|
Cash, cash equivalents and restricted cash:
|
|
|
|
|
|
Beginning of period, including cash in disposal group
|
25,548
|
|
|
34,302
|
|
|
End of period
|
$
|
2,071
|
|
|
$
|
18,664
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
Cash paid for interest
|
$
|
2,211
|
|
|
$
|
2,105
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities:
|
|
|
|
|
Issuance of common stock upon warrant exercise
|
$
|
—
|
|
|
$
|
59,907
|
|
|
Capitalization of interest to debt principal
|
$
|
171
|
|
|
$
|
—
|
|
|
Common stock subscription payable
|
$
|
—
|
|
|
$
|
849
|
|
|
Increase in loan payable
|
$
|
1,103
|
|
|
$
|
—
|
|
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 that deliver relevant, dynamic content and e-commerce solutions. Our common stock is listed on the Nasdaq Capital Market under the ticker symbol MARK.
Going Concern
During the
six months ended June 30, 2019
, and in each fiscal year since our inception, we have incurred net losses which have resulted in an accumulated deficit of
$332.8 million
as of
June 30, 2019
. Additionally, our operations have historically used more cash than they have provided. Net cash used in continuing operating activities was
$7.5 million
during the
six months ended June 30, 2019
. As of
June 30, 2019
, our cash and cash equivalents balance was
$2.1 million
, and we had a negative working capital balance of
$21.8 million
.
On March 29, 2019, we entered into a common stock purchase agreement (the “2019 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 2019 Aspire Purchase Agreement. The 2019 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 July 2, 2018 (the “2018 Aspire Purchase Agreement”).
Concurrently with entering into the 2019 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 2019 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 2019 Aspire Purchase Agreement.
As of
June 30, 2019
, we have issued to Aspire Capital a total of
2,504,370
shares of our common stock under the 2019 Aspire Purchase Agreement. During the
six months ended June 30, 2019
, we issued a total of
7,074,597
shares of our common stock to a private investor and to Aspire Capital under the 2018 Aspire Purchase Agreement and the 2019 Aspire Purchase Agreement in exchange for approximately
$7.5 million
plus Aspire Capital’s commitment to participate in the 2019 Aspire Purchase Agreement.
We are a party to a financing agreement dated as of September 24, 2015 (as amended, the “Financing Agreement”) with certain of our subsidiaries as borrowers (together with Remark, the “Borrowers”), certain of our subsidiaries as guarantors (the “Guarantors”), the lenders from time to time party thereto (the “Lenders”) and MGG Investment Group LP (“MGG”), in its capacity as collateral agent and administrative agent for the Lenders, 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
June 30, 2019
are described in
Note 11
, which also describes our ongoing events of default relating to our failure to make certain required payments under the Financing Agreement as well as certain other ongoing events of default.
On May 15, 2019, we completed the sale of all of the issued and outstanding membership interests of Vegas.com, LLC (“Vegas.com”), pursuant to a Membership Interest Purchase Agreement, dated as of March 15, 2019, with VDC-MGG Holdings LLC, an affiliate of MGG, for an aggregate purchase price of
$30 million
(the “VDC Transaction”). The cash proceeds of the VDC Transaction were used to pay amounts due under the Financing Agreement, of which approximately
$10 million
remained outstanding after giving effect to the application of such cash proceeds.
Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities, in conjunction with the ongoing events of default under the Financing Agreement, give rise to substantial doubt regarding our ability to continue as a going concern.
We intend to fund our future operations and meet our financial obligations through revenue growth in our Technology and Data Intelligence segment; however, we cannot provide assurance that revenue, income and cash flows 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). As a result, we are actively evaluating strategic alternatives including debt refinancing and potential sales of investment assets or operating businesses. However, we may need to obtain additional capital through equity financing.
Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions, will play primary roles in determining whether we can successfully obtain additional capital. Additionally, pursuant to the Financing Agreement, we are subject to certain limitations on our ability and the ability of our subsidiaries to, among other things, incur additional debt and transfer, sell or otherwise dispose of assets, without the consent of the Lenders. We cannot be certain that we will be successful at raising additional capital.
A variety of factors, many of which are outside of our control, affect our cash flow; those factors include regulatory issues, competition, financial markets and other general business conditions. Based on financial projections, we believe that we will be able to meet our ongoing requirements for at least the next 12 months following this report (including the amounts required under the Financing Agreement, based on the current status of discussions with the Lenders regarding ongoing events of default) with existing cash, cash equivalents and cash resources, and based on the probable success of one or more of the following plans:
|
|
|
|
•
|
monetize existing assets
|
|
|
|
|
•
|
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 the success of our plans is largely outside of our control. As a result, there is substantial doubt regarding our ability to continue as a going concern, and we may fully utilize our cash resources prior to
August 9, 2020
.
Comparability
We have reclassified certain amounts in our
June 30, 2018
unaudited condensed consolidated financial statements to conform to the current presentation as of
June 30, 2019
. Specifically, we have changed how we present operating expense to better reflect the activities that generate such expense. Neither total stockholders’ deficit as of
June 30, 2018
nor net loss or cash flows for the three and six months ended
June 30, 2018
changed because of the reclassifications.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of
June 30, 2019
, with the audited Consolidated Balance Sheet amounts as of
December 31, 2018
presented for comparative purposes, and the related unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss, the Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Stockholders’ Deficit 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 and our unaudited Condensed Consolidated Statement of Stockholders’ Deficit, each as of
June 30, 2019
, as well as our unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss and 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 “
2018
Form 10-K”).
Consolidation
We include all of our subsidiaries, which include the variable-interest entities (“VIEs”) for which we are the primary beneficiary, in our condensed 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 unaudited condensed consolidated financial statements, we make estimates and assumptions that affect amounts reported and disclosed in the unaudited condensed 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, and inventory reserve, among other items.
Changes to Significant Accounting Policies - Leases
We adopted Accounting Standards Codification Topic 842,
Leases
(“ASC 842”), as of January 1, 2019. When adopting ASC 842 we elected several practical expedients permitted under the transition guidance within ASC 842, which, among other things, allowed us to carry forward the historical lease classification and to avoid recording leases that had expired prior to the date of adoption. We also elected to combine the lease and non-lease components of our leases for office space (which represent the largest portion of our operating lease assets and liabilities) and not to record leases with initial terms of 12 months or less (short-term leases) on the balance sheet. We amortize the cost of short-term leases on a straight-line basis over the lease term.
As of January 1, 2019, our adoption of ASC 842 added
$4.9 million
of operating lease assets,
$1.1 million
of current operating lease liabilities (reported in Accrued expense and other current liabilities) and
$5.7 million
of long-term operating lease liabilities to our balance sheet, and it removed
$3.3 million
of previously-recorded deferred rent and early lease termination liabilities; it had no effect on consolidated net loss or consolidated cash flows.
Recently Issued Accounting Pronouncements
We have reviewed all recently issued accounting pronouncements. The pronouncements that we have already adopted, except as noted above for leases, 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
six months ended June 30, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Data platform services:
|
|
|
|
|
|
|
|
|
FinTech services
|
—
|
|
|
2,219
|
|
|
—
|
|
|
3,376
|
|
|
AI-based products and services
|
2,466
|
|
|
1,150
|
|
|
2,890
|
|
|
1,176
|
|
|
Advertising and other
|
399
|
|
|
518
|
|
|
1,184
|
|
|
1,161
|
|
|
Revenue
|
$
|
2,865
|
|
|
$
|
3,887
|
|
|
$
|
4,074
|
|
|
$
|
5,713
|
|
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. During the
six months ended June 30, 2019
, our contract liability related to continuing operations changed only as a result of routine business activity.
During the
six months ended June 30, 2019
, we did
no
t recognize material amounts of revenue which was included in the beginning balance of Contract liability at January 1, 2019, while we recognized
$0.3 million
of revenue during the
six months ended June 30, 2018
which was included in the beginning balance of Contract liability at January 1, 2018.
During the
six months ended June 30, 2019
and
2018
, we did not recognize revenue from performance obligations within the scope of ASC 606 that were satisfied in previous periods.
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 common stock. As of
June 30, 2019
, 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:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
CBG Financing Warrants
|
|
|
|
|
Expected volatility
|
85.00
|
%
|
|
70.00
|
%
|
|
Risk-free interest rate
|
1.88
|
%
|
|
2.52
|
%
|
|
Expected remaining term (years)
|
1.23
|
|
|
1.73
|
|
|
CBG Acquisition Warrants
|
|
|
|
|
Expected volatility
|
75.00
|
%
|
|
70.00
|
%
|
|
Risk-free interest rate
|
1.74
|
%
|
|
2.46
|
%
|
|
Expected remaining term (years)
|
4.22
|
|
|
4.72
|
|
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
June 30, 2019
, we estimated that
four
future equity financing events would potentially occur within the subsequent twelve months.
Our estimate of expected volatility and our stock price tend to have the most significant impact on the estimated fair value of the 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
|
$
|
75
|
|
|
$
|
35
|
|
|
CBG Acquisition Warrants
|
175
|
|
|
175
|
|
|
|
|
|
|
|
Change in stock price
|
|
|
|
|
CBG Financing Warrants
|
$
|
35
|
|
|
$
|
—
|
|
|
CBG Acquisition Warrants
|
60
|
|
|
60
|
|
The following table presents the change in the liability balance associated with our liability-classified warrants (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
Balance at beginning of period
|
$
|
1,383
|
|
|
$
|
89,169
|
|
|
Warrant exercises
|
—
|
|
|
(59,907
|
)
|
|
Increase (decrease) in fair value
|
(662
|
)
|
|
(27,879
|
)
|
|
Balance at end of period
|
$
|
721
|
|
|
$
|
1,383
|
|
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 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, 2017, and 2018 (the “Earnout Payments”). The significant unobservable inputs that we used, which we classify in Level 3 of the fair value hierarchy, were projected earnings before interest, taxes, depreciation and amortization (“EBITDA”), the probability of achieving certain amounts of EBITDA, and the rate used to discount the liability.
The following table presents the change during the
six months ended June 30, 2019
in the balance of the liability associated with the Earnout Payments (in thousands):
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
990
|
|
|
Payments
|
—
|
|
|
Change in fair value of contingent consideration (included in Other loss)
|
10
|
|
|
Interest accrued on unpaid balance
|
56
|
|
|
Balance at end of period
|
$
|
1,056
|
|
On the Condensed Consolidated Balance Sheets, we included the liability for contingent consideration as a component of Accrued expense and other liabilities.
NOTE 5. INVESTMENT IN UNCONSOLIDATED AFFILIATES
In 2009, we co-founded a U.S.-based venture, Sharecare, Inc. (“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
June 30, 2019
, 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
June 30, 2019
, 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 recognize our equity in the net earnings or losses relating to AIO on a one-quarter reporting lag in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. For the three months ended
June 30, 2019
, the amount of our equity in AIO’s net earnings for their quarter ended March 31, 2019 was not material.
NOTE 6. PREPAID EXPENSE AND OTHER CURRENT ASSETS
The following table presents the components of prepaid expense and other current assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31, 2018
|
|
Other receivables
|
$
|
4,236
|
|
|
$
|
4,607
|
|
|
Prepaid expense
|
1,098
|
|
|
1,076
|
|
|
Deposits
|
1,342
|
|
|
1,395
|
|
|
Inventory, net
|
345
|
|
|
587
|
|
|
Other current assets
|
192
|
|
|
242
|
|
|
Total
|
$
|
7,213
|
|
|
$
|
7,907
|
|
|
|
|
|
|
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands, except estimated lives):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Life
(Years)
|
|
June 30,
2019
|
|
December 31, 2018
|
|
Computers and equipment
|
3
|
|
1,004
|
|
|
1,004
|
|
|
Furniture and fixtures
|
3
|
|
20
|
|
|
20
|
|
|
Software
|
3
|
|
4,921
|
|
|
4,918
|
|
|
Software development in progress
|
|
|
1,050
|
|
|
924
|
|
|
Leasehold improvements
|
10
|
|
312
|
|
|
310
|
|
|
Total property, equipment and software
|
|
|
$
|
7,307
|
|
|
$
|
7,176
|
|
|
Less accumulated depreciation
|
|
|
(5,512
|
)
|
|
(5,101
|
)
|
|
Total property, equipment and software, net
|
|
|
$
|
1,795
|
|
|
$
|
2,075
|
|
For the
six months ended June 30, 2019
and
2018
, depreciation (and amortization of software) expense was
$0.4 million
and
$0.8 million
, respectively.
NOTE 8. LEASES
We lease office space and equipment under contracts we classify as operating leases. None of our leases are financing leases. Several of our leases include one or more options to renew; however, as of
June 30, 2019
, we are not reasonably certain that we will exercise the renewal options and we have not included such renewal options in the lease liabilities or disclosures herein.
As of
June 30, 2019
, the current portion of our operating lease liability was
$1.5 million
and was reported in Accrued expense and other current liabilities on our Unaudited Condensed Consolidated Balance Sheet.
The following table presents the detail of our lease expense, net of sublease income, which is reported in General and administrative expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
|
Operating lease expense
|
$
|
385
|
|
|
$
|
703
|
|
|
Short-term lease expense
|
98
|
|
|
164
|
|
|
Less: Sublease income
|
(78
|
)
|
|
(78
|
)
|
|
Lease expense
|
$
|
405
|
|
|
$
|
789
|
|
We reported within continuing operating cash flows
$0.9 million
of cash paid for amounts included in the measurement of operating lease liabilities.
As of
June 30, 2019
, our operating leases had a weighted-average remaining lease term of approximately
51
months, and we used a weighted-average discount rate of
13%
to measure our operating lease liabilities.
Maturity of Lease Liabilities
The following table presents information regarding the maturities of our undiscounted remaining operating lease payments, with a reconciliation to the amount of the liabilities representing such payments as presented in our
June 30, 2019
Unaudited Condensed Consolidated Balance Sheet (in thousands).
|
|
|
|
|
|
|
|
Operating lease liabilities maturing during the next:
|
|
|
One year
|
$
|
2,326
|
|
|
Two years
|
2,217
|
|
|
Three years
|
2,091
|
|
|
Four years
|
1,768
|
|
|
Five years
|
1,204
|
|
|
Thereafter
|
—
|
|
|
Total undiscounted cash flows
|
$
|
9,606
|
|
|
Present value of cash flows
|
$
|
7,301
|
|
|
|
|
|
Lease liabilities on balance sheet:
|
|
|
Short-term
|
1,463
|
|
|
Long-term
|
5,838
|
|
|
Total lease liabilities
|
$
|
7,301
|
|
Significant Judgments
When accounting for our leases, we make certain judgments, such as whether a contract contains a lease or what discount rate to use, that affect the determination of the amount of our lease assets and liabilities. Based on the current facts and circumstances related to our contracts, none of the judgments we make involve an elevated degree of qualitative significance or complexity such that further disclosure is warranted.
NOTE 9. INTANGIBLE ASSETS
The following table summarizes intangible assets by category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
|
Finite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain names
|
$
|
1,256
|
|
|
$
|
(838
|
)
|
|
$
|
418
|
|
|
$
|
1,256
|
|
|
$
|
(801
|
)
|
|
$
|
455
|
|
|
Media content and broadcast rights
|
1,350
|
|
|
(1,058
|
)
|
|
292
|
|
|
1,350
|
|
|
(923
|
)
|
|
427
|
|
|
Other intangible assets
|
68
|
|
|
(68
|
)
|
|
—
|
|
|
68
|
|
|
(68
|
)
|
|
—
|
|
|
|
$
|
2,674
|
|
|
$
|
(1,964
|
)
|
|
$
|
710
|
|
|
$
|
2,674
|
|
|
$
|
(1,792
|
)
|
|
$
|
882
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
License to operate in China
|
128
|
|
|
|
|
128
|
|
|
128
|
|
|
|
|
128
|
|
|
Total intangible assets
|
$
|
2,802
|
|
|
|
|
$
|
838
|
|
|
$
|
2,802
|
|
|
|
|
$
|
1,010
|
|
Total amortization expense was
$0.2 million
and
$0.4 million
for the
six months ended
June 30, 2019
and
2018
, respectively.
NOTE 10. INCOME TAX
Our effective tax rate (“ETR”) from continuing operations was
0.0%
for the
six months ended June 30, 2019
. The quarterly ETR has not significantly differed from our historical annual ETR because we continue to maintain a full valuation allowance against our existing deferred tax assets.
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 debt (in thousands) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31, 2018
|
|
Loan payable to MGG
|
$
|
11,248
|
|
|
$
|
35,500
|
|
|
Unamortized original issue discount
|
—
|
|
|
(1,418
|
)
|
|
Unamortized debt issuance cost
|
—
|
|
|
(18
|
)
|
|
Carrying value of Loan
|
11,248
|
|
|
34,064
|
|
|
Exit fee payable in relation to Loan
|
—
|
|
|
1,250
|
|
|
Total long-term debt
|
$
|
—
|
|
|
$
|
35,314
|
|
|
Less: current portion
|
—
|
|
|
(35,314
|
)
|
|
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
June 30, 2019
, after amendments and other events described below, the Loan bore interest at three-month LIBOR (with a floor of
2%
) plus
11%
per annum, payable monthly, and had a maturity date of May 15, 2020. As of
June 30, 2019
, the applicable interest rate on the Loan was approximately
14%
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 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 constituted 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.
On May 15, 2019, we completed the VDC Transaction and used the cash proceeds of
$30 million
to pay amounts due under the Financing Agreement, of which approximately
$10 million
remained outstanding after giving effect to the application
of such cash proceeds. On the same date, in connection with the closing of the VDC Transaction, we entered into Amendment No. 6 and Waiver to Financing Agreement (the “Sixth Financing Amendment”), pursuant to which, among other things, (i) the Lenders waived all events of default under the Financing Agreement existing as of the date of the Sixth Financing Amendment, (ii) MGG released any and all liens in the equity interests of Vegas.com and its subsidiaries and their assets and properties, (iii) the Borrowers may add the amount of any accrued and unpaid interest to the outstanding principal amount of the Loan, (iv) the remaining principal amount outstanding under the Financing Agreement will accrue interest at a rate equal to the three-month LIBOR (with a floor of
2%
) plus
8.5%
per annum, (v) the continuing Loan will have a maturity date of May 15, 2020, (vi) covenants with respect to capital expenditures and revenue generated by our KanKan business were eliminated and covenants regarding the minimum value of certain of our assets, our minimum liquidity and the amount we are permitted to invest in our non-U.S. subsidiaries were modified, and (vii) we are required to commence a sale process with respect to our equity in Sharecare within
five
business days of the effective date of the Sixth Financing Amendment, and to use the net cash proceeds of such sale to pay in full our outstanding obligations under the Financing Agreement the (“Sharecare Covenant”).
The Financing Agreement contains certain affirmative and negative covenants, including but not limited to a covenant requiring us to maintain a minimum of
$1.0 million
in unrestricted cash in designated bank accounts. As of
June 30, 2019
, we were not in compliance with such covenant. We were also not in compliance with certain other covenants under the Financing Agreement, including covenant requiring us to obtain and pay for a tail directors’ and officers’ liability insurance policy (the “Tail Policy”) by June 4, 2019 in connection with the VDC Transaction, and a covenant requiring us to make the final Earnout Payment by June 14, 2019. Additionally, although we have actively taken steps to monetize our ownership interest in Sharecare, we did not comply with certain procedural requirements stipulated by the Sharecare Covenant. Our non-compliance with such covenants constitutes events of default under the Financing Agreement. In addition, the Lenders paid the
$1.1 million
of premium under the Tail Policy on our behalf and such amount was added to the amount of principal due under the Financing Agreement.
NOTE 12. OTHER LIABILITIES
The following table presents the components of other liabilities (in thousands):
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Deferred rent
|
$
|
1,583
|
|
|
Accrued early lease termination liability
|
1,137
|
|
|
Deferred tax liability, net
|
214
|
|
|
Total
|
$
|
2,934
|
|
|
|
|
NOTE 13. COMMITMENTS AND CONTINGENCIES
At
June 30, 2019
, we had no material commitments outside the normal course of business.
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, STOCK-BASED COMPENSATION AND NET LOSS PER SHARE
Equity Issuances
On March 29, 2019, we entered into the 2019 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 2019 Aspire Purchase Agreement. On April 5, 2019, the conditions necessary for purchases under the 2019 Aspire Purchase Agreement to commence were satisfied and the 2018 Aspire Purchase Agreement was terminated under the terms of the 2019 Aspire Purchase Agreement. We issued
629,370
shares of our common stock to Aspire Capital upon commencement of the 2019 Aspire Purchase Agreement.
Under the 2019 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 trading day, up to an aggregate of
$30.0 million
under the 2019 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 2019 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 trading 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 2019 Aspire 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
$0.25
. There are no trading volume requirements or restrictions under the 2019 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 2019 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 2019 Aspire Purchase Agreement. The 2019 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 2019 Aspire Purchase Agreement.
The 2019 Aspire Purchase Agreement provides that the total number of shares that may be issued pursuant to such agreement is limited to
8,140,373
shares (the “Exchange Cap”), or
19.99%
of our shares of common stock outstanding as of the date of the 2019 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 Exchange Cap is reached if at all times thereafter the average purchase price paid for all shares issued under the 2019 Aspire Purchase Agreement is equal to or greater than
$1.85
per share. The 2019 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
June 30, 2019
, we have issued to Aspire Capital a total of
2,504,370
shares of our common stock under the 2019 Aspire Purchase Agreement. During the
six months ended June 30, 2019
, we issued a total of
7,074,597
shares of our common
stock to a private investor and to Aspire Capital under the 2018 Aspire Purchase Agreement and the 2019 Aspire Purchase Agreement in exchange for
$7.5 million
plus Aspire Capital’s commitment to participate in the 2019 Aspire Purchase Agreement.
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
June 30, 2019
, and changes during the
six
months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term
(in years)
|
|
Aggregate Intrinsic Value (in thousands)
|
|
Outstanding at January 1, 2019
|
10,874,849
|
|
|
$
|
4.36
|
|
|
|
|
|
|
Granted
|
25,000
|
|
|
1.66
|
|
|
|
|
|
|
Exercised
|
(2,250
|
)
|
|
1.99
|
|
|
|
|
|
|
Forfeited, cancelled or expired
|
(94,742
|
)
|
|
3.82
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
10,802,857
|
|
|
$
|
4.35
|
|
|
6.3
|
|
$
|
—
|
|
|
Options exercisable at June 30, 2019
|
10,802,857
|
|
|
$
|
4.35
|
|
|
6.3
|
|
$
|
—
|
|
The following table summarizes activity under our equity incentive plans related to the China Cash Bonuses as of
June 30, 2019
, and changes during the
six
months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term
(in years)
|
|
Aggregate Intrinsic Value (in thousands)
|
|
Outstanding at January 1, 2019
|
1,464,750
|
|
|
$
|
5.60
|
|
|
|
|
|
|
Granted
|
152,000
|
|
|
1.56
|
|
|
|
|
|
|
Forfeited, cancelled or expired
|
(280,250
|
)
|
|
5.79
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
1,336,500
|
|
|
$
|
5.09
|
|
|
8.1
|
|
$
|
—
|
|
|
Bonuses exercisable at June 30, 2019
|
709,250
|
|
|
$
|
5.37
|
|
|
7.3
|
|
$
|
—
|
|
During the
six months ended June 30, 2019
, we did not award restricted stock under our equity incentive plans.
During the
three months ended June 30, 2019
and
2018
, we incurred share-based compensation expense (benefit) of
$(0.1) million
and
$0.3 million
, respectively, and we incurred share-based compensation expense of
$0.2 million
and
$11.8 million
, respectively, during the
six months ended June 30, 2019
and
2018
.
Net Loss per Share
For the
three and six
months ended
June 30, 2019
and
2018
, there were no reconciling items related to either the numerator or denominator of the loss per share calculation, except that for the second quarter of 2018 the denominator changed as a result of applying the treasury stock method to outstanding in-the-money stock options; however, the change in the denominator did not lead to a dilution of basic earnings per share.
Securities which would have been anti-dilutive to a calculation of diluted earnings per share for the
three and six
months ended
June 30, 2019
and
2018
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
3,651,574
shares of our common stock at an exercise price of
$4.02
per share.
NOTE 15. SEGMENT INFORMATION
As a result of our disposal of the previously-reported Travel and Entertainment segment, we currently report one segment: 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 maker uses Adjusted EBITDA as the primary measure of profitability for evaluating the operational performance of our reportable segment. Adjusted EBITDA represents operating income (loss) plus depreciation and amortization expense, share-based compensation expense, impairments and net other income, less other loss. We do not allocate certain types of shared expense, such as legal and accounting, to our reportable segment; such costs are included in Corporate Entity and Other.
The following table presents certain financial information regarding our reportable segment and other entities for the
three and six
months ended
June 30, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology & Data Intelligence
|
|
Corporate Entity and Other
|
|
Consolidated
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
Revenue
|
$
|
2,465
|
|
|
$
|
400
|
|
|
$
|
2,865
|
|
|
Adjusted EBITDA
|
$
|
(344
|
)
|
|
$
|
(2,310
|
)
|
|
$
|
(2,654
|
)
|
|
Three Months Ended June 30, 2018
|
|
|
|
|
|
|
Revenue
|
$
|
3,369
|
|
|
$
|
518
|
|
|
$
|
3,887
|
|
|
Adjusted EBITDA
|
$
|
(1,974
|
)
|
|
$
|
(3,312
|
)
|
|
$
|
(5,286
|
)
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
Revenue
|
$
|
2,890
|
|
|
$
|
1,184
|
|
|
$
|
4,074
|
|
|
Adjusted EBITDA
|
$
|
(3,003
|
)
|
|
$
|
(4,927
|
)
|
|
$
|
(7,930
|
)
|
|
Six Months Ended June 30, 2018
|
|
|
|
|
|
|
Revenue
|
$
|
4,552
|
|
|
$
|
1,161
|
|
|
$
|
5,713
|
|
|
Adjusted EBITDA
|
$
|
(3,492
|
)
|
|
$
|
(8,864
|
)
|
|
$
|
(12,356
|
)
|
|
|
|
|
|
|
|
The following table reconciles Adjusted EBITDA to Loss before income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Adjusted EBITDA
|
$
|
(2,654
|
)
|
|
$
|
(5,286
|
)
|
|
$
|
(7,930
|
)
|
|
$
|
(12,356
|
)
|
|
Depreciation and amortization
|
(260
|
)
|
|
(546
|
)
|
|
(585
|
)
|
|
(1,137
|
)
|
|
Share-based compensation benefit (expense)
|
102
|
|
|
(281
|
)
|
|
(223
|
)
|
|
(11,755
|
)
|
|
Other income, net
|
(92
|
)
|
|
(43
|
)
|
|
(47
|
)
|
|
(44
|
)
|
|
Other loss
|
(27
|
)
|
|
(554
|
)
|
|
(1
|
)
|
|
(523
|
)
|
|
Operating loss
|
$
|
(2,931
|
)
|
|
$
|
(6,710
|
)
|
|
$
|
(8,786
|
)
|
|
$
|
(25,815
|
)
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
(553
|
)
|
|
(330
|
)
|
|
(940
|
)
|
|
(672
|
)
|
|
Other income, net
|
92
|
|
|
43
|
|
|
47
|
|
|
44
|
|
|
Change in fair value of warrant liability
|
2,078
|
|
|
10,055
|
|
|
662
|
|
|
18,665
|
|
|
Other gain, net
|
27
|
|
|
554
|
|
|
1
|
|
|
523
|
|
|
Total other income (expense), net
|
$
|
1,644
|
|
|
$
|
10,322
|
|
|
$
|
(230
|
)
|
|
$
|
18,560
|
|
|
Income (loss) from continuing operations before income taxes
|
$
|
(1,287
|
)
|
|
$
|
3,612
|
|
|
$
|
(9,016
|
)
|
|
$
|
(7,255
|
)
|
The following table presents total assets for our reportable segment and the corporate and other entities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31, 2018
|
|
Technology & Data Intelligence segment
|
15,505
|
|
|
15,563
|
|
|
Corporate entity and other business units
|
9,946
|
|
|
5,156
|
|
|
Consolidated
|
$
|
25,451
|
|
|
$
|
20,719
|
|
Capital expenditures for our Technology & Data Intelligence segment were de minimus during the
three months ended June 30, 2019
and totaled
$0.2 million
during the
three months ended June 30, 2018
. During the
six months ended June 30, 2019
and
2018
, capital expenditures for our Technology & Data Intelligence segment totaled
$0.1 million
and
$0.5 million
, respectively.
NOTE 16. DISCONTINUED OPERATIONS
On May 15, 2019, we completed the VDC Transaction for an aggregate purchase price of
$30 million
. The business we sold in the VDC Transaction formerly comprised our Travel and Entertainment segment. In discontinued operations, we recognized a gain on the VDC Transaction of
$6.5 million
.
The following table presents the carrying amounts of the major classes of assets and liabilities associated with the disposed Travel and Entertainment segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
May 15, 2019
|
|
December 31, 2018
|
|
Cash and cash equivalents (including restricted cash)
|
$
|
18,011
|
|
|
$
|
24,138
|
|
|
Other current assets
|
4,753
|
|
|
4,828
|
|
|
Current assets
|
$
|
22,764
|
|
|
$
|
28,966
|
|
|
Property and equipment, net
|
7,331
|
|
|
8,495
|
|
|
Goodwill and other intangibles, net
|
28,977
|
|
|
35,434
|
|
|
Other assets
|
1,856
|
|
|
194
|
|
|
Total assets
|
$
|
60,928
|
|
|
$
|
73,089
|
|
|
|
|
|
|
|
Accounts payable, accrued expense and other current liabilities
|
$
|
22,749
|
|
|
$
|
33,053
|
|
|
Deferred merchant booking
|
7,358
|
|
|
4,664
|
|
|
Contract liability
|
5,381
|
|
|
3,931
|
|
|
Current liabilities
|
$
|
35,488
|
|
|
$
|
41,648
|
|
|
Other liabilities
|
1,938
|
|
|
34
|
|
|
Total liabilities
|
$
|
37,426
|
|
|
$
|
41,682
|
|
The following table presents the major classes of line items constituting the pretax profit or loss of the disposed Travel and Entertainment segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenue
|
$
|
9,178
|
|
|
$
|
16,826
|
|
|
$
|
27,432
|
|
|
$
|
31,724
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (excluding depreciation and amortization)
|
1,240
|
|
|
2,852
|
|
|
4,016
|
|
|
5,617
|
|
|
Selling, general and administrative
|
7,506
|
|
|
9,647
|
|
|
18,383
|
|
|
19,314
|
|
|
Technology and development
|
1,082
|
|
|
2,209
|
|
|
3,280
|
|
|
4,455
|
|
|
Depreciation, amortization and impairments
|
5,860
|
|
|
2,200
|
|
|
8,007
|
|
|
4,327
|
|
|
Other operating expense
|
139
|
|
|
253
|
|
|
384
|
|
|
447
|
|
|
Other expense (income) and loss (gain), net
|
(4,948
|
)
|
|
924
|
|
|
(3,814
|
)
|
|
1,978
|
|
|
Loss from discontinued operations before income taxes
|
(1,701
|
)
|
|
(1,259
|
)
|
|
(2,824
|
)
|
|
(4,414
|
)
|
|
Benefit from income taxes
|
214
|
|
|
—
|
|
|
214
|
|
|
—
|
|
|
Loss from discontinued operations
|
$
|
(1,487
|
)
|
|
$
|
(1,259
|
)
|
|
$
|
(2,610
|
)
|
|
$
|
(4,414
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and impairments includes
$4.8 million
of impairments of goodwill and intangible assets resulting from our decision to dispose of the previously-reported Travel and Entertainment segment.
For the three and
six months ended June 30, 2019
, we allocated
$1.6 million
and
$2.7 million
of interest expense to discontinued operations. We make such allocations based on the amount of debt specifically attributable to the discontinued operations.
|
|
|
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
You should read our discussion and analysis of our financial condition and results of operations for the
three and six
months ended
June 30, 2019
in conjunction with our unaudited condensed consolidated financial statements and notes thereto set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q. Such discussion and analysis includes forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. You should also read “
Special Note Regarding Forward-Looking Statements
” in the section following the table of contents of this report.
OVERVIEW
We are a diversified global technology company with leading artificial intelligence (“AI”) and data-analytics solutions, as well as a portfolio of digital media properties.
Remark AI Business
Through our proprietary data and AI platform, our Remark AI business (currently known in the Asia-Pacific region as KanKan, and which we report as our Technology & Data Intelligence segment) generates our data platform services revenue by delivering AI-based vision products, computing devices and software-as-a-service (“SaaS”) solutions for businesses in many industries. Our technology is becoming noted for its performance. In June 2019, in addition to other recent successes on other testing platforms, our facial-recognition algorithms received a top ranking in the National Institute of Standards and Technology’s Wild Image Accuracy Test, a widely-recognized, global facial-recognition-testing platform. In addition to the other work that we have ramped up, we continue partnering with top universities on research projects targeting algorithm, artificial neural network and computing architectures which we believe keeps us among the leaders in technology development. Though we currently focus our KanKan business on the Asia-Pacific region, we have initiated marketing activities in Europe and the United States and are continuing to launch several proof-of-concept projects.
We have been introducing Remark AI’s innovative AI-based solutions into the retail, “smart city”, public safety, and workplace markets.
Retail Solutions.
Utilizing a client’s existing cameras and strategic sensors placed throughout the store, Remark AI’s retail solutions swiftly analyze real-time customer shopping behavior, such as time of store entry and shelf-browsing habits, and provides managers with a customer heatmap that reflects traffic patterns. Purchase history is also analyzed, leading to relevant offers for future purchase conversions, and customers for their continued loyalty through a special VIP status that brings customized promotions and coupons along with attentive customer service. Remark AI’s retail solutions allow retailers and store managers to make better data-driven decisions regarding store layout, item placement, and pricing strategy, all while anonymizing customers’ identities to protect their privacy.
Smart City and Public Safety Solutions.
Big-data analysis helps city planners predict road conditions, and assist in urban road planning. Our solutions assist in monitoring traffic for various violations by automatically detecting, capturing, and obtaining evidence regarding violations such as speeding, running red lights, driving against the flow of traffic and even using counterfeit registration plates. Additionally, our solutions provide constant road-condition monitoring, providing control centers with real-time information on traffic conditions such as areas of congestion or other traffic anomalies.
Workplace and Food Safety Solutions.
The monitoring and detection capabilities of our solutions ensure that workers are practicing established food safety protocols, wearing the proper safety gear, and complying with local health codes. From commercial kitchens to construction work zones, our safety-compliance algorithms manage regulatory functions, review hygienic and equipment status while checking and alerting management regarding violations.
Other Business
In addition to AI and data-analytics solutions, we maintain a digital media portfolio which, in addition to operating businesses, includes approximately five-percent ownership in the issued stock of Sharecare, Inc., an established health and wellness platform with more than 100 million users, which has now raised in excess of $400 million of total capital. We continue to evaluate opportunities to monetize and maximize the value of this asset for our shareholders. In addition to Data Platform Services revenue from our Remark AI business, activities such as online merchandise sales at our other operating businesses also contributed to our consolidated revenue in the current-year and prior-year periods, while advertising also contributed to revenue in prior-year periods.
Overall Business Outlook
Our innovative AI and data-analytics solutions continue to gain worldwide awareness and recognition through media exposure, comparative testing, product demonstrations and word of mouth resulting from positive responses and increased acceptance. We intend to continue expanding our business, particularly in the Asia-Pacific region, where we believe there are greater market opportunities for our solutions. However, we may continue to face challenges in 2019 due to continuing economic and geopolitical conditions in some international regions. We continue to pursue large business opportunities, but it is difficult to anticipate how long it will take to close these opportunities, or if they will ever ultimately come to fruition. It is also difficult to determine whether our software solutions will be accepted as viable in the market segments we have identified, which include a number of large, well-known competitors. The continued expansion of our business is expected to cause increases in our operating expenses in the future.
Business Developments During 2019
On May 15, 2019, we completed the sale of Vegas.com, which allowed us to use the resulting proceeds to significantly reduce our debt and also further our near-complete focus on data analytics and AI technology. We continued to work closely with a diverse group of clients and executed on various stages of AI product deployment, including a project that uses KanKan’s facial-recognition technology to provide access control at more than 1,000 access points in the buildings of one of China’s top software companies, and another that installed
KanKan’s
taxi-safety-monitoring system
in more than 2,000 taxis in the Chinese city of Xi’an. Our installation of 5,000 terminals of our AI-driven pharmacy-patient terminal system in 2018 led to an additional contract to install in 2019 an additional 15,000 terminals in pharmacies in additional Chinese cities.
The following table presents our revenue categories as a percentage of total consolidated revenue during the three and
six months ended June 30, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Data platform services:
|
|
|
|
|
|
|
|
|
FinTech services
|
—
|
%
|
|
57
|
%
|
|
—
|
%
|
|
59
|
%
|
|
AI-based products and services
|
86
|
%
|
|
30
|
%
|
|
71
|
%
|
|
21
|
%
|
|
Advertising and other
|
14
|
%
|
|
13
|
%
|
|
29
|
%
|
|
20
|
%
|
Matters Affecting Comparability of Results
We disposed of the subsidiaries comprising our formerly-reported Travel and Entertainment segment and we have reported such former segment as discontinued operations in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. Unless otherwise noted therein, the Results of Operations section below only discusses our continuing operations.
We have changed how we present operating expense to better reflect the activities that generate such expense. As a result, the operating expense line items in our results of operations for the three months ended June 30, 2018 were reclassified to conform to the current presentation as of
June 30, 2019
.
CRITICAL ACCOUNTING POLICIES
During the
three and six
months ended
June 30, 2019
, we made no material changes to our critical accounting policies as we disclosed them in Part II, Item 7 of our
2018
Form 10-K.
RESULTS OF OPERATIONS
The following discussion summarizes our operating results for the three and
six
months ended
June 30, 2019
compared to the three and
six
months ended
June 30, 2018
.
Reportable Segment Results
Technology & Data Intelligence
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Three Months Ended June 30,
|
|
Change
|
|
|
|
2019
|
|
2018
|
|
Dollars
|
|
Percentage
|
|
Revenue
|
|
$
|
2,465
|
|
|
$
|
3,369
|
|
|
$
|
(904
|
)
|
|
(27
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
1,311
|
|
|
3,199
|
|
|
(1,888
|
)
|
|
(59
|
)%
|
|
Sales and marketing
|
|
119
|
|
|
217
|
|
|
(98
|
)
|
|
(45
|
)%
|
|
Technology and development
|
|
776
|
|
|
1,152
|
|
|
(376
|
)
|
|
(33
|
)%
|
|
General and administrative
|
|
402
|
|
|
844
|
|
|
(442
|
)
|
|
(52
|
)%
|
|
Depreciation and amortization
|
|
135
|
|
|
161
|
|
|
(26
|
)
|
|
(16
|
)%
|
|
Other operating expense
|
|
—
|
|
|
24
|
|
|
(24
|
)
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Six Months Ended June 30,
|
|
Change
|
|
|
|
2019
|
|
2018
|
|
Dollars
|
|
Percentage
|
|
Revenue
|
|
$
|
2,890
|
|
|
$
|
4,552
|
|
|
$
|
(1,662
|
)
|
|
(37
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
2,604
|
|
|
4,392
|
|
|
(1,788
|
)
|
|
(41
|
)%
|
|
Sales and marketing
|
|
445
|
|
|
400
|
|
|
45
|
|
|
11
|
%
|
|
Technology and development
|
|
2,002
|
|
|
1,847
|
|
|
155
|
|
|
8
|
%
|
|
General and administrative
|
|
854
|
|
|
1,190
|
|
|
(336
|
)
|
|
(28
|
)%
|
|
Depreciation and amortization
|
|
305
|
|
|
317
|
|
|
(12
|
)
|
|
(4
|
)%
|
|
Other operating expense
|
|
6
|
|
|
46
|
|
|
(40
|
)
|
|
(87
|
)%
|
Revenue.
During the three and
six months ended June 30, 2019
, we generated revenue as a result of passing proof-of-concept tests on projects and beginning the deployment and implementation phases. Such projects deliver fully-integrated AI solutions which combine our proprietary technology with third-party hardware and software products to meet end-user specifications. In the prior-year period, our revenue primarily resulted from providing loan candidates under then-existing FinTech contracts, a service we have since discontinued due to regulatory changes resulting from the industry-wide audit in
China in 2018. Our cost of revenue also decreased for the three and
six months ended June 30, 2019
due to our decision to discontinue the FinTech contract services.
During the three and
six months ended June 30, 2019
, we recognized approximately $1.1 million and $0.8 million, respectively, of revenue on projects delivered in prior periods and the cost of revenue was recognized in prior periods. We could not, however, recognize the revenue in the prior periods because uncertainty regarding the timing of collection prevented us from determining that collectability of all amounts payable to us under the contracts was probable.
Technology and development.
Our technology and development expense decreased for the
three months ended June 30, 2019
primarily as a result of a stock-based compensation expense decrease of approximately $0.2 million. Such decrease is related to the estimated fair value liability associated with our China Cash Bonuses, which decreased due to a reduction in the price of our common stock compared to the same period of the prior year. A smaller decrease in payroll and related costs resulting from lower headcount also contributed to the overall decrease in our technology and development expense.
General and administrative.
The decrease in general and administrative expense for the three and
six months ended June 30, 2019
resulted because the comparative periods of the prior year included the recording of approximately $0.3 million of allowance for doubtful accounts that was not repeated in the current-year periods.
Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Three Months Ended June 30,
|
|
Change
|
|
|
|
2019
|
|
2018
|
|
Dollars
|
|
Percentage
|
|
Revenue
|
|
$
|
2,865
|
|
|
$
|
3,887
|
|
|
$
|
(1,022
|
)
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
1,541
|
|
|
3,280
|
|
|
(1,739
|
)
|
|
(53
|
)%
|
|
Sales and marketing
|
|
687
|
|
|
1,074
|
|
|
(387
|
)
|
|
(36
|
)%
|
|
Technology and development
|
|
854
|
|
|
1,288
|
|
|
(434
|
)
|
|
(34
|
)%
|
|
General and administrative
|
|
2,454
|
|
|
4,385
|
|
|
(1,931
|
)
|
|
(44
|
)%
|
|
Depreciation and amortization
|
|
260
|
|
|
546
|
|
|
(286
|
)
|
|
(52
|
)%
|
|
Other operating expense
|
|
—
|
|
|
24
|
|
|
(24
|
)
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(553
|
)
|
|
(330
|
)
|
|
(223
|
)
|
|
68
|
%
|
|
Other income
|
|
92
|
|
|
43
|
|
|
49
|
|
|
114
|
%
|
|
Change in FV of warrant liability
|
|
2,078
|
|
|
10,055
|
|
|
(7,977
|
)
|
|
(79
|
)%
|
|
Other gain
|
|
27
|
|
|
554
|
|
|
(527
|
)
|
|
(95
|
)%
|
|
Benefit from income taxes
|
|
—
|
|
|
1,026
|
|
|
(1,026
|
)
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Six Months Ended June 30,
|
|
Change
|
|
|
|
2019
|
|
2018
|
|
Dollars
|
|
Percentage
|
|
Revenue
|
|
$
|
4,074
|
|
|
$
|
5,713
|
|
|
$
|
(1,639
|
)
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
3,134
|
|
|
4,547
|
|
|
(1,413
|
)
|
|
(31
|
)%
|
|
Sales and marketing
|
|
1,546
|
|
|
2,057
|
|
|
(511
|
)
|
|
(25
|
)%
|
|
Technology and development
|
|
2,158
|
|
|
2,091
|
|
|
67
|
|
|
3
|
%
|
|
General and administrative
|
|
5,431
|
|
|
21,650
|
|
|
(16,219
|
)
|
|
(75
|
)%
|
|
Depreciation and amortization
|
|
585
|
|
|
1,137
|
|
|
(552
|
)
|
|
(49
|
)%
|
|
Other operating expense
|
|
6
|
|
|
46
|
|
|
(40
|
)
|
|
(87
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(940
|
)
|
|
(672
|
)
|
|
(268
|
)
|
|
40
|
%
|
|
Other income
|
|
47
|
|
|
44
|
|
|
3
|
|
|
7
|
%
|
|
Change in FV of warrant liability
|
|
662
|
|
|
18,665
|
|
|
(18,003
|
)
|
|
(96
|
)%
|
|
Other gain
|
|
1
|
|
|
523
|
|
|
(522
|
)
|
|
(100
|
)%
|
|
Benefit from income taxes
|
|
—
|
|
|
995
|
|
|
(995
|
)
|
|
(100
|
)%
|
In addition to the results of operations of our reportable segment that we described above, the following items impacted our consolidated results of operations:
Cost of revenue.
The increase in cost of revenue for the
six months ended June 30, 2019
resulted from an increase in e-commerce sales.
Sales and marketing.
The decrease in sales and marketing expense for the three and
six months ended June 30, 2019
primarily resulted from a decrease in headcount in certain of our businesses, which caused approximate decreases of $0.2 million and $0.4 million, respectively, in payroll and related costs. Immaterial decreases in consulting fees and travel expense also contributed to the overall decline in sales and marketing expense.
General and administrative.
The decrease in general and administrative expense incurred by our non-reportable-segment businesses in the
second
quarter of
2019
from the corresponding
2018
period was affected by the following:
|
|
|
|
•
|
Consulting fees decreased approximately $0.5 million, primarily as a result of decreased use of temporary external consultants.
|
|
|
|
|
•
|
Approximately $0.3 million of one-time bonuses were paid in 2018 that were not repeated during 2019.
|
|
|
|
|
•
|
Payroll and related costs, excluding bonuses, decreased approximately $0.2 million as a result of headcount reductions in finance and administration.
|
|
|
|
|
•
|
Stock-based compensation and franchise taxes collectively decreased by approximately $0.2 million.
|
The decrease in general and administrative expense incurred by our non-reportable-segment businesses in the
six months ended June 30, 2019
from the corresponding
2018
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. We did not make a similar grant in the current year.
|
|
|
|
|
•
|
Rent expense decreased $2.4 million almost exclusively because, in March 2018, we recognized a liability on the early abandonment of a lease. No similar transactions occurred during the first half of the current year.
|
|
|
|
|
•
|
Consulting fees decreased approximately $0.6 million, primarily as a result of decreased use of temporary external consultants.
|
|
|
|
|
•
|
Payroll and related costs, excluding bonuses, decreased approximately $0.4 million as a result of headcount reductions in finance and administration.
|
|
|
|
|
•
|
Approximately $0.3 million of one-time bonuses were paid in 2018 that were not repeated during 2019.
|
|
|
|
|
•
|
We reduced business travel in 2019, resulting in a decrease of approximately $0.3 million in travel expense.
|
Depreciation and amortization.
The decrease in depreciation and amortization for the three and
six months ended June 30, 2019
was the result of long-lived assets which were being depreciated or amortized in the prior-year periods which were no longer being depreciated in the current year periods, either as a result of impairments and write offs or as a result of such assets being fully depreciated or amortized before, or during the early part of, the current year periods.
Interest expense.
The increase in interest expense for the three and
six months ended June 30, 2019
was primarily related to our recognition of previously-unamortized debt discount and debt fees as a result of our prepayment of a portion of our debt when we completed the VDC Transaction. Such prepayment of debt also partially offset the increase from the accelerated amortization of debt discount and debt fees because of the lower debt principal amount for the last half of the
three months ended June 30, 2019
.
Other gain.
While we only recorded de minimis amounts of Other gain during the three and
six months ended June 30, 2019
, the comparable prior-year periods included approximately $0.6 million of gain on the disposal of the IRS.com domain.
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 decrease in our common stock price between March 31, 2019 and
June 30, 2019
resulted in a corresponding decrease in the fair value of our warrant liability. The decrease in our common stock price was smaller in scale than the decrease in our common stock price between March 31, 2018 and
June 30, 2018
and, as a result, we recognized less of a gain in the current period than during the same period of 2018.
The decrease in our common stock price between December 31, 2018 and
June 30, 2019
was much smaller in scale than the decrease in our common stock price between December 31, 2017 and
June 30, 2018
; therefore, during the
six months ended June 30, 2019
, we recognized less of a gain than during the same period of 2018. In both the quarter-to-date and year-to-date periods of 2019, the amount of the decrease from the same periods in 2018 in the recognized gain that resulted from stock price decreases was partially offset by increases in the estimated fair values of the warrant liability that resulted because we increased our estimate of stock price volatility as an input to the model we use for fair value estimation.
LIQUIDITY AND CAPITAL RESOURCES
Overview
During the
six months ended June 30, 2019
, and in each fiscal year since our inception, we have incurred net losses which have resulted in an accumulated deficit of
$332.8 million
as of
June 30, 2019
. Additionally, our operations have historically used more cash than they have provided. Net cash used in continuing operating activities was
$7.5 million
during the
six
months ended June 30, 2019
. As of
June 30, 2019
, our cash and cash equivalents balance was
$2.1 million
, and we had a negative working capital balance of
$21.8 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 original aggregate principal amount of $35.5 million. As of
June 30, 2019
, the Loan bore interest at three-month LIBOR (with a floor of 2%) plus 11% per annum, payable monthly, and had a maturity date of May 15, 2020. The material terms of the Financing Agreement, the amendments thereto, and related documents effective as of
June 30, 2019
are described in
Note 11
in the Notes to Unaudited Condensed Consolidated Financial Statements. As of
June 30, 2019
, $11.2 million of aggregate principal remained outstanding under the Loan, which bore an applicable interest rate of approximately
14%
per annum. Our available cash and other liquid assets are not sufficient to pay our obligations under the Financing Agreement in full.
The Financing Agreement contains certain affirmative and negative covenants, including but not limited to a covenant requiring us to maintain a minimum of
$1.0 million
in unrestricted cash in designated bank accounts. As of
June 30, 2019
, we were not in compliance with such covenant. We were also not in compliance with certain other covenants under the Financing Agreement, including covenant requiring us to obtain and pay for a tail directors’ and officers’ liability insurance policy (the “Tail Policy”) by June 4, 2019 in connection with the VDC Transaction, and a covenant requiring us to make the final Earnout Payment by June 14, 2019. Additionally, although we have actively taken steps to monetize our ownership interest in Sharecare, we did not comply with certain procedural requirements stipulated by the Sharecare Covenant. Our non-compliance with such covenants constitutes events of default under the Financing Agreement. In addition, the Lenders paid the
$1.1 million
of premium under the Tail Policy on our behalf and such amount was added to the amount of principal due under the Financing Agreement.
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 were obligated to make an Earnout Payment of $1.0 million based upon the performance of Vegas.com in the year ended December 31, 2018, but we have not yet made such payment.
On March 29, 2019, we entered into the 2019 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 2019 Aspire Purchase Agreement. On April 5, 2019, the conditions necessary for purchases under the 2019 Aspire Purchase Agreement to commence were satisfied and the 2018 Aspire Purchase Agreement was terminated under the terms of the 2019 Aspire Purchase Agreement. We issued 629,370 shares of our common stock to Aspire Capital upon commencement of the 2019 Aspire Purchase Agreement. Purchases under the 2019 Aspire Purchase Agreement, which is described in more detail in
Note 14
in the Notes to Unaudited Condensed Consolidated Financial Statements, are made at prices calculated in accordance with the terms of the 2019 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 2019 Aspire Purchase Agreement is limited to the Exchange Cap, 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 Exchange Cap is reached if at all times thereafter the average purchase price paid for all shares issued under the 2019 Aspire Purchase Agreement is equal to or greater than $1.85 per share.
Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities, in conjunction with the ongoing events of default under the Financing Agreement, give rise to substantial doubt regarding our ability to continue as a going concern.
We intend to fund our future operations and meet our financial obligations through revenue growth in our Technology and Data Intelligence segment; however, we cannot provide assurance that revenue, income and cash flows 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). As a result, we are actively evaluating strategic alternatives including debt
refinancing and potential sales of investment assets or operating businesses. However, we may need to obtain additional capital through equity 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
|
|
|
|
|
•
|
obtain additional capital through equity issuances, including but not limited to under the 2019 Aspire Purchase Agreement (which issuances may dilute existing stockholders)
|
However, projections are inherently uncertain and the success of our plans is largely outside of our control. As a result, there is substantial doubt regarding our ability to continue as a going concern, and we may fully utilize our cash resources prior to
August 9, 2020
.
Cash Flows - Continuing Operating Activities
During the
six months ended June 30, 2019
, we used
$2.7 million
less cash in continuing operating activities than we did during the same period of the prior year. The decrease in cash used in continuing operating activities is a result of the timing of payments related to elements of working capital.
Cash Flows - Continuing Investing Activities
During the
six months ended June 30, 2019
, we received $30.0 million in proceeds from the VDC Transaction, while no similar transaction occurred in the prior year.
Cash Flows - Financing Activities
During the
six months ended June 30, 2019
, we received $7.5 million from sales of shares of our common stock, whereas we did not sell shares of our stock during the same period of 2018. The increase in sales of our common stock was partially offset by a decrease in exercises of outstanding options to purchase our common stock. We also paid $27.8 million in debt fees and debt principal in the current year, compared to payments for debt fees during the same period of 2018 of $0.5 million.
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.