Document


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

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
Commission File Number 001-33720
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Remark Holdings, Inc.


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

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
 
 
Common Stock, $0.001 par value per share
 
The NASDAQ Stock Market LLC
 
 
Rights to Purchase Series A Junior Participating Preferred Stock
 
The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  
    No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  
    No  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☑
As of June 30, 2018, the aggregate market value of our voting and non-voting common equity held by non-affiliates was $106.8 million.
As of March 28, 2019, a total of 40,722,229 shares of our common stock were outstanding.

Documents Incorporated By Reference

Information required by Part III of this Annual Report on Form 10-K is incorporated by reference to portions of our definitive proxy statement for our 2019 annual meeting of stockholders which we will file with the Securities and Exchange Commission.




TABLE OF CONTENTS

PART I
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
 
 
 
 
 


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS


The matters discussed in this Annual Report on Form 10-K (this “2018 Form 10-K”) include “forward-looking statements” about the plans, strategies, objectives, goals or expectations of Remark Holdings, Inc. and subsidiaries (“Remark”, “we”, “us”, “our”). You will find forward-looking statements principally in the sections entitled Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements are identifiable by words or phrases indicating that Remark or management “expects,” “anticipates,” “plans,” “believes,” or “estimates,” or that a particular occurrence or event “will,” “may,” “could,” “should,” or “will likely” result, occur or be pursued or “continue” in the future, that the “outlook” or “trend” is toward a particular result or occurrence, that a development is an “opportunity,” “priority,” “strategy,” “focus,” that we are “positioned” for a particular result, or similarly stated expectations. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date of this 2018 Form 10-K, other report, release, presentation, or statement.

In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this 2018 Form 10-K and other periodic reports filed with the Securities and Exchange Commission (“SEC”), there are many important factors that could cause actual results to differ materially. Such risks and uncertainties include general business conditions, changes in overall economic conditions, our ability to integrate acquired assets, the impact of competition and other factors which are often beyond our control.
 
This should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, operations, liquidity, financial condition and prospects. We undertake no obligation to update or revise our forward-looking statements to reflect developments that occur or information that we obtain after the date of this 2018 Form 10-K.



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PART I

ITEM 1.
BUSINESS.

OVERVIEW

Remark Holdings, Inc. and subsidiaries (“Remark”, “we”, “us”, or “our”), which include its consolidated variable-interest entities (“VIEs”), are primarily technology-focused. Our KanKan data intelligence platform serves as the basis for our development and deployment of artificial-intelligence-based solutions for businesses in many industries and geographies. We also own and operate digital media properties across multiple verticals, such as travel and entertainment and young adult lifestyle, that deliver relevant, dynamic content and e-commerce solutions. Our U.S. operations are headquartered in Las Vegas, Nevada, and our China operations are headquartered in Chengdu, China with additional operations in Beijing, Shanghai, and Hangzhou. Our common stock, par value $0.001 per share, is listed on the NASDAQ Capital Market under the ticker symbol MARK.


OUR BUSINESS

Development

In 2009, we co-founded a U.S.-based venture, Sharecare, to build a web-based platform that simplifies the search for health and wellness information. The other co-founders of Sharecare were Dr. Mehmet Oz, HARPO Productions, Discovery Communications, Jeff Arnold and Sony Pictures Television. As a part of the transactions, we received an equity stake in Sharecare, which constitutes approximately five percent of Sharecare’s issued capital stock at December 31, 2018. We also maintain representation on Sharecare’s Board of Directors.

In March 2013, we entered the young adult lifestyle vertical with the acquisition of Pop Factory, LLC, a beach lifestyle digital media brand providing website and mobile content. Later the same year, we introduced a refreshed brand and a new, mobile-optimized website at www.bikini.com, which includes e-commerce.

We transitioned in 2015 from being a strictly content-based company to a technology company. We leverage KanKan, our data intelligence platform, to deliver an integrated suite of AI solutions that enable businesses and organization to solve problems, reduce risk and deliver positive outcomes. The easy-to-install AI products are being rolled out in a wide range of applications within the retail, financial, public safety and workplace arenas.

In September 2015, we acquired (the “VDC Acquisition”) Vegas.com LLC (“Vegas.com” or “VDC”) to give us a deeper reach into the travel and entertainment market in Las Vegas and the surrounding area. Vegas.com is a well-established brand and, through websites and mobile applications that it controls, it allows users to book travel to, and lodging and entertainment in, the Las-Vegas-area market. In March 2019, we entered into an agreement to sell Vegas.com to an affiliate of our lenders (the “VDC Transaction”; see Note 17 in the Notes to Consolidated Financial Statements for more information), which transaction is expected to close during the second quarter of 2019.

In September 2016, we completed the acquisition (the “CBG Acquisition”) of assets of China Branding Group Limited (“CBG”), pursuant to the terms of the Second Amended and Restated Asset and Securities Purchase Agreement, dated as of the same date (the “CBG Purchase Agreement”), with CBG and the other parties specified therein. During 2018, we re-branded the assets that are now referred to as Remark Entertainment (formerly referred to as our Fanstang business).

In the foreseeable future, we will continue to focus primarily on developing and monetizing new AI-based products and services using our KanKan data intelligence platform and deploying such products and services in the vast Asia market across multiple industries. Additionally, we have begun marketing activities in Europe and the US and we will continue such activities.



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Business Model

We currently earn a majority of our revenue from sales of various travel and entertainment products (including lodging, air travel, show tickets and tours) booked through our travel and entertainment segment, consisting of Vegas.com and its related websites (including LasVegas.com), mobile applications and retail locations.

We also recognize revenue from the following sources:

sales of AI-based products and services from our KanKan business

sales of financial-technology (“FinTech”) products and services from our KanKan business

various advertising mechanisms associated with our websites


Excluding general and administrative expense, the primary costs we incur to earn the revenue described above include:

credit card fees

costs related to providing tours, such as permits, fees, fuel, vehicle leases and vehicle repair

software and website development costs, including licensing costs for third-party software

data acquisition and customer acquisition costs

cost of equipment related to customized AI products

costs associated with marketing our brands
 

Travel and Entertainment

Vegas.com comprises our travel and entertainment business. We believe that Vegas.com is the premiere online booking service for all of the exciting travel and entertainment opportunities related to Las Vegas and the immediately-surrounding areas. Vegas.com offers users the ability to book lodging, air travel, show tickets and tours, and its customer service team is staffed by Las Vegas locals who are intimately familiar with Las Vegas and the various products and services offered through the website. As previously noted, in March 2019, we entered into an agreement to sell Vegas.com to an affiliate of our lenders, which transaction is expected to close during the second quarter of 2019.


Technology and Data Intelligence

Our KanKan business comprises our Technology & Data Intelligence business. KanKan generates our data platform services revenue by developing and deploying artificial intelligence (“AI”) products and AI-based solutions for businesses in many industries and geographies, as well as by providing financial technology (“FinTech”) products and services. Though we currently focus our KanKan business on the Asia-Pacific region, we have initiated marketing activities in Europe and the United States and are launching several proof-of-concept projects.

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


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Other Digital Media Assets

Young Adult Lifestyle

Bikini.com is our e-commerce website selling swimwear and accessories in the latest styles, which we currently intend to promote primarily on a subscription basis in the future.


Competition

We compete for business primarily in the online travel and entertainment booking marketplace and in the FinTech and AI marketplaces, each of which are intensely competitive and, with regard to the FinTech and AI marketplaces, rapidly evolving.


Travel and Entertainment

The primary factors upon which we compete are price and promotions, knowledge of the Las Vegas area, customer service and the quality and features of our sales channels. We believe the following are our primary competitors:

online travel reservation services such as The Priceline Group (priceline.com, booking.com), Expedia (expedia.com, hotels.com, hotwire.com, travelocity.com, orbitz.com), as well as websites of hotels and casinos

online travel search services and price comparison services such as TripAdvisor, Trivago (majority-owned by Expedia), and HotelsCombined

websites, such as Todtix.com, Bestofvegas.com and Showtickets.com, that sell tickets to Las Vegas-area events

traditional “brick-and-mortar” retailers, such as casino box offices and Tix4tonight, that sell tickets to Las Vegas-area events


We also face competition for customer traffic on Internet search engines and metasearch websites, which impacts our sales and marketing costs.


Technology and Data Intelligence

With our KanKan business, we primarily compete on the basis of the quality and reliability of our products and services.

FinTech. The credit infrastructure in China is not yet as well developed as the credit infrastructure in the United States. We believe the traditional system underserves a large number of persons who are financially active but who do not yet have lengthy credit histories. In the FinTech market space (financial institutions and peer-to-peer lenders), we are, in essence, competing against our potential customers’ traditional systems of screening their own loan candidates.

AI-based products and services. Our AI-based products and services represent a significant opportunity for us in the future. We offer facial recognition products and we also build and deploy custom AI solutions. Our facial recognition products compete with companies such as SenseTime, Face++, Google, GoGoVan, WeLab and others, while we compete with companies such as PriceWaterhouseCoopers, Hewlett Packard, Baidu and others for business in the AI solutions market space.


Some of the companies we compete against, or may compete against in the future, may have greater brand recognition and may have significantly greater financial, marketing and other resources than we have. As a result of the potentially greater brand recognition and resources, some of our competitors may bring new products and services to market more quickly, and they may be able to adopt more aggressive pricing policies than we could adopt.



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Intellectual Property
 
We rely upon trademark, copyright and trade secret laws in various jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary assets and brands. We own two U.S. patents and one patent in each of Canada and Hong Kong, as well as several copyright registrations related to Vegas.com. Regarding our Technology and Data Intelligence segment, we own 12 copyright registrations, we have 62 patents pending in China and we have several additional patent applications we are preparing to file in China. We also hold various trademarks for our brands, and we have additional applications pending.


Technology

Our technologies include software applications built to run on third-party cloud hosting providers including Amazon Web Services and Alibaba located in North America and Asia. We make substantial use of off-the-shelf available open-source technologies such as Linux, PHP, MySQL, Drupal, mongoDB, Memcache, Apache, Nginx, CouchBase, Hadoop, HBase, ElasticSearch, Lua, Java, Redis, Akka and Wordpress, in addition to commercial platforms such as Microsoft, including Windows Operating Systems, SQL Server, and .NET. Such systems are connected to the Internet via load balancers, firewalls, and routers installed in multiple redundant pairs. We also utilize third-party services to geographically deliver data using major content distribution network providers. We rely heavily on virtualization throughout our technology architecture, which enables the scaling of dozens of digital media properties in an efficient and cost effective manner.

We use third-party cloud hosting providers to host most of our public-facing websites and applications, as well as many of our back-end business intelligence and financial systems. Each of our significant websites is designed to be fault-tolerant, with collections of application servers, typically configured in a load-balanced state, to provide additional resiliency. The infrastructure is equipped with enterprise-class security solutions to combat events such as large scale distributed denial of service attacks. Our environment is staffed and equipped with a full-scale monitoring solution.


Governmental Regulation

The services we provide are subject to various laws and regulations. We must comply with laws and regulations relating to the travel industry and the provision of travel services, including laws requiring us to register as “sellers of travel” and compliance with certain disclosure requirements. In addition, our travel business is subject to regulation by the U.S. Department of Transportation and must comply with various rules and regulations governing the provision of air transportation, including those relating to advertising and accessibility.

We are subject to a number of U.S. federal and state and foreign laws and regulations that affect companies conducting business on the Internet. These laws and regulations may involve privacy, rights of publicity, data protection, content regulation, intellectual property, competition, protection of minors, consumer protection, taxation or other subjects. Many of these laws and regulations are still evolving and being tested in courts and could be interpreted in ways that could harm our business. In addition, the application and interpretation of these laws and regulations often are uncertain, particularly in the new and rapidly evolving industry in which we operate. There are a number of legislative proposals pending before federal, state, and foreign legislative and regulatory bodies concerning data protection that may affect us.

We post our privacy policy and practices concerning the use and disclosure of any user data on our web properties and our distribution applications. Any failure by us to comply with posted privacy policies, federal and state regulatory requirements or foreign privacy-related laws and regulations could result in proceedings by governmental or regulatory bodies that could potentially harm our businesses, results of operations and financial condition.

Foreign data protection, privacy, and other laws and regulations can be more restrictive than those in the United States. The Chinese government has at times taken measures to restrict digital platforms, publishers or specific content themes from consumption by its citizens. We invest significant efforts into ensuring that our published content in China is consistent with our most current understanding of prevailing Chinese laws, regulations, and policies; and to date our published content in China has been met with successful distribution and no action or inquiry from the Chinese government. However, unforeseen regulatory restrictions or policy changes in China regarding digital content could have a material adverse effect on our business.


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The Chinese government has not yet adopted a clear regulatory framework governing the new and rapidly-evolving artificial intelligence industry in which we operate. The Chinese government’s adoption of more stringent laws or enforcement protocols affecting participants in such industries (including, without limitation, restrictions on foreign investment, capital requirements and licensing requirements) could have a material adverse effect on our business.


Corporate Structure

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 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 believe that we are the primary beneficiary of the VIEs because the equity holders of such entities do not have significant equity at risk and because we have been able to direct the operations of the VIEs.

The following diagram illustrates our China holding structure as of the date of this 2018 Form 10-K. The diagram omits certain entities which are immaterial to our results of operations and financial condition. Equity interests depicted in this diagram are 100% owned. The relationships between each of Chengdu Remark Technology Co., Ltd.; Hangzhou Shufeng Technology Co., Ltd.; Remark Data Technology Co., Ltd. and BoNet (Beijing) Technology LLC, on the one hand, and KanKan Technology (Shanghai) Co., Ltd., on the other hand, as illustrated in the following diagram are governed by contractual arrangements, including in each case an Exclusive Call Option Agreement, an Exclusive Business Cooperation Agreement, a Proxy Agreement and an Equity Pledge Agreement, and do not constitute equity ownership.

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Employees

We employed approximately 290 people as of March 28, 2019, substantially all of which are full-time employees.


ADDITIONAL INFORMATION

We were originally incorporated in Delaware in March 2006 as HSW International, Inc., we changed our name to Remark Media, Inc. in December 2011, and as our business continued to evolve, we changed our name to Remark Holdings, Inc. in April 2017.

As soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC, we provide free access through our website (www.remarkholdings.com) to our Annual Reports on Form 10-K, Quarterly Reports on Form

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10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We do not incorporate any information found on our website into the materials we file with, or furnish to, the SEC; therefore, you should not consider any such information a part of any filing we make with the SEC.

You may also obtain the reports noted above at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. You may also access this information at the SEC’s website (www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.


ITEM 1A.
RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information contained in this 2018 Form 10-K, including our consolidated financial statements and notes thereto, before deciding whether to invest in our common stock. Additional risks and uncertainties that we are unaware of may become important factors that affect us. If any of these risks actually occur, our business, financial condition or operating results may suffer, the trading price of our common stock could decline, and you may lose all or part of your investment.


Risks Relating to Our Business and Industry

If we are unable to maintain or increase the number of visitors interacting with, and making purchases on, our owned-and-operated websites and mobile applications in a cost-effective manner, our business, financial condition and results of operations may be adversely affected.

We earn a substantial amount of our revenue from transactions occurring on our websites and Internet-based mobile applications. Providing a high-quality, highly-efficient and user-friendly online experience, in a cost-effective manner, is vital to our operations. Failure to do so could adversely affect user experiences and reduce traffic to our owned-and-operated websites and mobile applications, which would adversely affect our business, financial condition, results of operations and cash flows. To attract traffic, we utilize search engine optimization related to our websites and the content published on them, a strategy that involves building websites with the objective of having them rank well in unpaid search engine results. Our ability to successfully manage search engine optimization efforts across our owned-and-operated websites is dependent on our timely and effective modification of search engine optimization practices implemented in response to periodic changes in search engine algorithms and methodologies and changes in search query trends and our ability to offer websites and content responsive to ever-changing consumer interests and trends. Our failure to successfully manage our search engine optimization strategy could result in a substantial decrease in traffic to our owned-and-operated websites, or an inability to attract traffic to new websites that we launch which could adversely affect our business, financial condition, results of operations and cash flows.

Even if we succeed in attracting traffic to our owned-and-operated websites, we may not be successful in monetizing the traffic. Additionally, the costs of attracting and retaining users to our websites may exceed our ability to generate revenues from such activities, which could have an adverse effect on our business, financial condition, results of operations and cash flows.


Our travel and entertainment business is dependent on providers of travel and entertainment products.

Our travel and entertainment business relies on providers of travel and entertainment products (including lodging, air travel, show tickets and tours) to make their products available to consumers through us. Our arrangements with such providers generally do not require them to make available any specific quantity of such products, or to make such products available at any particular price. A significant reduction on the part of any of our major providers, or providers that are particularly popular with consumers, in their participation in our services for a sustained period of time or their complete withdrawal could have a material adverse effect on our business and results of operations.



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Our travel business derives a significant portion of its revenues from the Las Vegas market and is especially subject to certain risks, including economic and competitive risks, associated with conditions in the Las Vegas area.

Because our Vegas.com subsidiary provides travel and entertainment booking services in the Las Vegas market exclusively, we are subject to greater risks from conditions in the Las Vegas area than travel booking companies that are more geographically diversified. Risks from conditions in the Las Vegas area include the following:

local economic and competitive conditions;

reduced land and air travel due to increasing fuel costs or transportation disruptions;

inaccessibility of the area due to inclement weather, natural disasters, road construction or closure of primary access routes;

the outbreak of public health threats in the area or the perception that such threats exist; and

a decline in the number of visitors.


Our travel business is particularly sensitive to reductions in discretionary consumer and corporate spending.

Expenditures on travel and entertainment and leisure activities are sensitive to personal and business-related discretionary spending levels and tend to decline or grow more slowly during economic downturns. Changes in discretionary spending or consumer preferences brought about by factors such as perceived or actual unfavorable changes in general economic conditions, high unemployment, perceived or actual changes in disposable consumer income and wealth, higher fuel or other transportation costs, or changes in consumer confidence could reduce demand for our services, which could adversely affect our travel business and our overall business, financial condition, results of operations and cash flows.


Declines or disruptions in the travel industry could adversely affect our travel business.

The success and financial performance of our travel business are affected by the health of the worldwide travel industry. Our business is sensitive to fluctuations in hotel supply, occupancy and average daily rates, decreases in airline capacity, periodically rising airline ticket prices, or the imposition of taxes or surcharges by regulatory authorities, all of which we have experienced historically.

Other factors that could negatively affect our business include:

air fare increases;

continued consolidation of air carriers and hotel providers;

travel-related strikes or labor unrest, bankruptcies or liquidations;

incidents of actual or threatened terrorism;

periods of political instability or geopolitical conflict in which travelers become concerned about safety issues;

natural disasters or events such as severe weather conditions, volcanic eruptions, hurricanes or earthquakes; and

health-related risks, such as the Ebola, H1N1, SARs and avian flu outbreaks.

Such concerns could result in a protracted decrease in demand for our travel services which, depending on its scope and duration and together with any future issues affecting travel safety, could adversely affect our business over the short and long-term. In addition, the disruption of the existing travel plans of a significant number of travelers upon the occurrence of certain events, such as severe weather conditions, actual or threatened terrorist activity or war, could result in the incurrence of significant additional costs and decrease our revenues leading to constrained liquidity if we provide relief to affected travelers by refunding the price or fees associated with hotel reservations and other travel products and services.


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As a creator and a distributor of digital content, we face potential liability for legal claims based on the nature and content of the materials that we create or distribute, or that are accessible via our owned-and-operated websites.

As a creator and distributor of original content and content provided by third parties, we face potential liability for legal claims, including defamation, negligence, unlawful practice of a licensed profession, copyright or trademark infringement or other legal theories relating to the information we publish on our websites, and under various laws, including the Lanham Act, the Digital Millennium Copyright Act and the Copyright Act. We may also be exposed to similar liability in connection with content that is posted to our owned-and-operated websites by users and other third parties through comments, profile pages, discussion forums and other social media features. In addition, it is also possible that visitors to our owned-and-operated websites could make claims against us for losses incurred in reliance upon information provided on our owned-and-operated websites. Any of these claims could result in significant costs to investigate and defend, regardless of the merit of the claims. If we are not successful in our defense, we may be forced to pay substantial damages. While we run our content through a rigorous quality control process, there is no guarantee that we will avoid future liability and potential expenses for legal claims, which could affect our business, financial condition, results of operations and cash flows.

Laws relating to the liability of providers of online services for activities of their advertisers and for the content of their advertisers’ listings are currently unsettled. Such claims have been brought, sometimes successfully, against online services as well as other print publications in the past. We may not successfully avoid liability for unlawful activities carried out by advertisers displayed on our websites. If we are subjected to such lawsuits, it may adversely affect our business.


The failures of third-party network and technology providers to provide adequate services in the future could cause technical problems with or failure of our websites or traffic, which could inhibit our revenues or damage our reputation and relationships with users, advertisers, and content providers.
 
We rely on many third-party businesses for technological, network, and expert services. Our ability to operate successfully depends on the successful operation of these third-party businesses, which carry their own risks. If one of our third-party vendors fails to deliver expected services, our websites and, therefore, our business could suffer operating problems or temporary failures. If there is a problem or failure with our websites, it could hurt our ability to advertise and damage our reputation with consumers and advertisers. Additionally, a termination of our hosting agreements or failure to renew on favorable terms could affect our business. Shifting hosting services could require management focus and time and potentially disrupt operations of our websites.
 
In addition, as operators of content websites reliant on user traffic to sell advertising, our users must have adequate and functioning Internet access. Technical problems with Internet access providers such as cable, DSL satellite or mobile companies may inhibit user access to our websites and slow traffic. Events such as power outages caused by blackouts, brown outs, storm outages or other power issues could also cause loss of user access to our websites.


We process, store and use personal information, payment card information and other consumer data, which subjects us to risks stemming from possible failure to comply with governmental regulation and other legal obligations.

We may acquire personal or confidential information from users of our websites and mobile applications, and we have posted our privacy policies and practices concerning the collection, use and disclosure of user data on such websites and mobile applications.

Numerous laws exist regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information, payment card information and other consumer data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection; however, these obligations may possibly be interpreted and applied in a manner that is inconsistent from one jurisdiction to another, and they may conflict with other rules or with our practices. Any failure or perceived failure by us, or our service providers, to comply with the privacy policies, privacy-related obligations to users or other third parties, or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information, payment card information or other consumer data, may result in governmental enforcement actions, litigation or public statements against the company by consumer advocacy groups or others and could cause our customers and members to lose trust in us, as well as subject us to bank fines, penalties or increased transaction costs, all of which could have an adverse effect on our business.


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The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet have recently come under increased public scrutiny. The U.S. Congress and federal agencies, including the Federal Trade Commission (the “FTC”) and the Department of Commerce, are reviewing the need for greater regulation for the collection and use of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices. Some U.S. courts are also considering the applicability of existing federal and state statutes, including computer trespass and wiretapping laws, to the collection and exchange of information online. Our introduction of new products, the expansion of our activities in certain jurisdictions, or other actions that we may take may subject us to additional laws, regulations, or other government scrutiny. In addition, foreign data protection, privacy, competition, and other laws and regulations can impose different obligations or be more restrictive than those in the United States. Countries in other regions, most notably Asia, Eastern Europe and Latin America, are increasingly implementing new privacy regulations, resulting in additional compliance burdens and uncertainty as to how some of these laws will be interpreted.

As a merchant that accepts debit and credit cards for payment, we are subject to the Payment Card Industry Data Security Standard (“PCI DSS”), issued by the PCI Council. Additionally, we are subject to PCI DSS as a service provider, which is a business entity that is not a payment brand directly involved in the processing, storage, or transmission of cardholder data. PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. By accepting debit cards for payment, we are also subject to compliance with American National Standards Institute data encryption standards and payment network security operating guidelines. The cost of complying with stricter privacy and information security laws, standards and guidelines, including evolving PCI DSS standards, and developing, maintaining and upgrading technology systems to address future advances in technology, could be significant and we could experience problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems. Failure to comply with such laws, standards and guidelines, or payment card industry standards could have a material adverse impact on our business, financial condition and results of operations.


Our network operations may be vulnerable to hacking, viruses and other disruptions, which may make our products and services less attractive and reliable and give rise to liabilities.

Our marketplaces and information technology platform generate and process a large quantity of personal, transactional, demographic and behavioral data. The security of data when engaging in e-commerce is essential to maintaining consumer confidence in our services. Any security breach whether instigated internally or externally on our system or other Internet based systems could significantly harm our reputation and therefore our business, brand, market share and results of operations. We require user names and passwords in order to access our information technology systems. We also use encryption and authentication technologies to secure the transmission and storage of data and prevent access to our data or accounts. It is possible that computer circumvention capabilities, new discoveries or advances or other developments, including our own acts or omissions, could result in a compromise or breach of consumer data. For example, third parties may attempt to fraudulently induce employees or customers to disclose user names, passwords or other sensitive information (“phishing”), which may in turn be used to access our information technology systems or to defraud our customers.

Our existing security measures may not be successful in preventing security breaches. A party (whether internal, external, an affiliate or unrelated third party) that is able to circumvent our security systems could steal consumer information or transaction data or other proprietary information and cause disruptions in our service. We may be required to expend significant resources to protect against security breaches or to address problems caused and liabilities incurred by breaches. These issues are likely to become more difficult to manage as we expand the number of places where we operate and as the tools and techniques used in such attacks become more advanced. Security breaches could result in severe damage to our information technology infrastructure, including damage that could impair our ability to offer our services, as well as loss of customer, financial or other data that could materially and adversely affect our ability to conduct our business, satisfy our commercial obligations or meet our public reporting requirements in a timely fashion or at all. Security breaches could also result in negative publicity, damage our reputation, expose us to risk of loss or litigation and possible liability, subject us to regulatory penalties and sanctions, or cause consumers to lose confidence in our security and choose to use the services of our competitors, any of which would have a negative effect on the value of our brand, our market share and our results of operations. Our insurance policies carry low coverage limits, and would likely not be adequate to reimburse us for losses caused by security breaches.

We also face risks associated with security breaches affecting third parties conducting business over the Internet. Consumers generally are concerned with security and privacy on the Internet, and any publicized security problems could

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inhibit the growth of the Internet and negatively affect consumers' willingness to provide private information or effect commercial transactions on the Internet generally, including through our services. Additionally, consumers using our services could be affected by security breaches at third parties such as travel service providers, payroll providers, health plan providers, payment processors or GDSs upon which we rely. If these third parties or developers fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our data or our customers’ data may be improperly accessed, used, or disclosed. A security breach at any such third-party marketing affiliate, travel service provider, GDS or other third party on which we rely could also be perceived by consumers as a security breach of our systems and in any event could result in negative publicity, damage our reputation, expose us to risk of loss or litigation and possible liability and subject us to regulatory penalties and sanctions. In addition, such third parties may not comply with applicable disclosure requirements, which could expose us to liability.

We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if no customer information is compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.

We use a cloud-based infrastructure. Like many companies using the cloud, we continually strive to meet industry information security standards relevant to our business. We continuously perform vulnerability assessments, review log/access, perform system maintenance, and manage network perimeter protection. A breach of external perimeter may lead to the loss of confidential information.


Our products and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.

Our products and internal systems rely on software, including software developed or maintained internally and/or by third parties, that is highly technical and complex. In addition, our products and internal systems depend on the ability of such software to store, retrieve, process, and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors, bugs, or vulnerabilities. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for users and marketers who use our products, delay product introductions or enhancements, result in measurement or billing errors, or compromise our ability to protect the data of our users and/or our intellectual property. Any errors, bugs, or defects discovered in the software on which we rely could result in damage to our reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect our business and financial results.


The artificial intelligence market is new and unproven, and it may decline or experience limited growth, which would adversely affect our ability to fully realize the potential of our KanKan data intelligence platform.

The artificial intelligence market is relatively new and unproven and is subject to a number of risks and uncertainties. We believe that our future success will depend in large part on the growth and acceptance of this market. The utilization of our platform by customers is still relatively new, and customers may not recognize the need for, or benefits of, our platform, which may prompt them to decide to adopt alternative products and services to satisfy their cognitive computing search and analytics requirements. Our ability to expand the market that our platform addresses depends upon a number of factors, including the cost, performance and perceived value of our platform. Market opportunity estimates are subject to significant uncertainty and are based on assumptions and estimates, including our internal analysis and industry experience. Assessing the market for our AI-based products in each of the vertical markets we compete in, or plan to compete in, is particularly difficult due to a number of factors, including limited available information and rapid evolution of the market. As a result, we may experience significant reduction in demand for our products and services due to lack of customer acceptance, technological challenges, competing products and services, decreases in spending by current and prospective customers, weakening economic conditions and other causes. If our market does not experience significant growth, or if demand for our AI-based products decreases, then our business, results of operations and financial condition will be adversely affected.



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Our continuous access to publicly-available data and to data from partners may be restricted, disrupted or terminated, which would restrict our ability to develop new products and services, or to improve existing products and services, which are based upon our KanKan data intelligence platform.

The success of our AI-based products depends substantially on our ability to continuously ingest and process large amounts of data available in the public domain and provided by our partners, and any interruption to our free access to such publicly-available data or to the data we obtain from our partners will restrict our ability to develop new products and services, or to improve existing products and services. While we have not encountered any significant disruption of such access to date, there is no guarantee that this trend will continue without costs. Public data sources may change their policies to restrict access or implement procedures to make it more difficult or costly for us to maintain access, and partners could decide to terminate our existing agreements with them. If we no longer have free access to public data, or access to data from our partners, the utility of our KanKan mobile application will be significantly reduced and our ability to maintain or improve existing products, or to develop new AI-based products using our DI Software, may be severely limited. Furthermore, we may be forced to pay significant fees to public data sources or to partners to maintain access, which would adversely affect our financial condition and results of operations.


The successful operation of our KanKan data intelligence platform will depend upon the performance and reliability of the Internet infrastructure in China.

The successful operation of KanKan will depend on the performance and reliability of the Internet infrastructure in China. Almost all access to the Internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology of China. In addition, the national networks in China are connected to the Internet through state-owned international gateways, which are the only channels through which a domestic user can connect to the Internet outside of China. We may not have access to alternative networks in the event of disruptions, failures or other problems with China’s Internet infrastructure. In addition, the Internet infrastructure in China may not support the demands associated with continued growth in Internet usage.

The failure of telecommunications network operators to provide us with the requisite bandwidth could also interfere with the speed and availability of KanKan. We have no control over the costs of the services provided by the national telecommunications operators. If the prices that we pay for telecommunications and Internet services rise significantly, our gross margins could be adversely affected. In addition, if Internet access fees or other charges to Internet users increase, our user traffic may decrease, which in turn may cause a decrease in our revenues.


We may be subject to liability in China with respect to KanKan and Remark Entertainment for content that is alleged to be socially destabilizing, obscene, defamatory, libelous or otherwise unlawful.

Under the laws of the People’s Republic of China, we will be required to monitor our websites and the websites hosted on our servers and mobile interfaces for items or content deemed to be socially destabilizing, obscene, superstitious or defamatory, as well as items, content or services that are illegal to sell online or otherwise in other jurisdictions in which we operate, and promptly take appropriate action with respect to such items, content or services. We may also be subject to potential liability in China for any unlawful actions of our customers or users of our websites or mobile interfaces or for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content that may result in liability to us, and if we are found to be liable, we may be subject to fines, have our relevant business operation licenses revoked, or be prevented from operating our websites or mobile interfaces in China.


Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.

We regard our copyrights, service marks, trademarks, trade secrets and other intellectual property as critical to our success. Unauthorized use of our intellectual property by third parties may adversely affect our business and reputation. We rely on trademark and copyright law, trade secret protection and confidentiality agreements with our employees, customers, business partners and others to protect our intellectual property rights. Despite our precautions, it is possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet related industries are uncertain and still evolving. In particular, the laws of the People’s Republic of China are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets

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or to determine the validity and scope of the proprietary rights of others. Future litigation could result in substantial costs and diversion of resources.


We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us, materially disrupt our business.

We cannot be certain that our brands and services will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We cannot provide assurance that we will avoid the need to defend against allegations of infringement of third-party intellectual property rights, regardless of their merit. Intellectual property litigation is very expensive, and becoming involved in such litigation could consume a substantial portion of our managerial and financial resources, regardless of whether we win. Substantially greater resources may allow some of our competitors to sustain the cost of complex intellectual property litigation more effectively than us; we may not be able to afford the cost of such litigation.

Should we suffer an adverse outcome from intellectual property litigation, we may incur significant liabilities, we may be required to license disputed rights from third parties, or we may have to cease using the subject technology. If we are found to infringe upon third-party intellectual property rights, we cannot provide assurance that we would be able to obtain licenses to such intellectual property on commercially reasonable terms, if at all, or that we could develop or obtain alternative technology. If we fail to obtain such licenses at a reasonable cost, such failure may materially disrupt the conduct of our business, and could consume substantial resources and create significant uncertainties. Any legal action against us or our collaborators could lead to:

payment of actual damages, royalties, lost profits, potentially treble damages and attorneys’ fees if we are found to have willfully infringed a third party’s patent rights;

injunctive or other equitable relief that may effectively block our ability to further develop, commercialize and sell our products;

us or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms, if at all; or

significant cost and expense, as well as distraction of our management from our business.


The negative outcomes discussed above could adversely affect our ability to conduct business, financial condition, results of operations and cash flows.


New regulations governing the Internet and e-commerce may negatively affect our business.

Any new legislation or regulation, or the application of existing laws and regulations to the Internet or other online services, could have a material adverse effect on our business, prospects, and financial conditions and results of operations.

In 2013, the FTC issued a letter reiterating the guidance it issued in 2002, which recommended that all search engine companies ensure that all paid search results are clearly distinguished from non-paid results, that the use of paid search is clearly and conspicuously explained and disclosed and that other disclosures are made to avoid misleading users about the possible effects of paid search listings on search results. The adoption of laws or regulations relating to placement of paid search advertisements or user privacy, defamation or taxation may inhibit the growth in use of the Internet, which in turn, could decrease the demand for our services and increase our cost of doing business or otherwise have a material adverse effect on our business, prospects, financial condition and results of operations.

The application of new and existing laws and regulations to the Internet or other online services has had a material adverse effect on our business, prospects, financial condition and results of operations in the past. For example, on April 17, 2007, the U.S. House of Representatives passed H.R. 1677, The Taxpayer Protection Act of 2007 (“H.R. 1677”). Section 8 of H.R. 1677 would have amended Section 333, Title 31 of the U.S. Code to include Internet domain addresses in the prohibition on certain use of the U.S. Department of the Treasury names and symbols. Although the legislation was never passed by the Senate or signed into law and the bill ceased with the ending of the 110th Congress in January 2009, there is no guarantee that similar legislation won’t be introduced and passed into law by the current or future Congress. While the ultimate impact of any such proposed legislation is not presently determinable, if enacted, such legislation may adversely impact our overall operations. We

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own the Internet domain address US Tax Center at www.irs.com, which is an acronym commonly associated with the Internal Revenue Service, a division of the U.S. Department of the Treasury. While the bill was never passed into law, if enacted, the passage of such legislation could have severely adversely affected our use of our Internet domain address US Tax Center at www.irs.com as well as our overall operations. In the event a bill such as H.R. 1677 were to become law, we intend to continue to be diligent in our communications with the Internal Revenue Service and Congress in an effort to mitigate any potential negative effects of such legislation.


We face intense competition from larger, more established companies, and we may not be able to compete effectively, which could reduce demand for our services.

The market for the services we offer is increasingly and intensely competitive. Nearly all our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Our competitors may secure more favorable revenue arrangements with advertisers, devote greater resources to marketing and promotional campaigns, adopt more aggressive growth strategies and devote substantially more resources to website and systems development than we do. In addition, the Internet media and advertising industries continue to experience consolidation, including the acquisitions of companies offering travel and finance-related content and services and paid search services. Industry consolidation has resulted in larger, more established and well-financed competitors with a greater focus. If these industry trends continue, or if we are unable to compete in the Internet media and paid search markets, our financial results may suffer.

Additionally, larger companies may implement policies and/or technologies into their search engines or software that make it less likely that consumers can reach our websites and less likely that consumers will click-through on sponsored listings from our advertisers. The implementation of such technologies could result in a decrease in our revenues. If we are unable to successfully compete against current and future competitors, our operating results will be adversely affected.


If we do not effectively manage our growth, our operating performance will suffer and our financial condition could be adversely affected.

Substantial future growth will be required for us to realize our business objectives. To the extent we are capable of achieving this growth, it will place significant demands on our managerial, operational and financial resources. Additionally, this growth will require us to make significant capital expenditures, hire, train and manage a larger work force, and allocate valuable management resources. We must manage any such growth through appropriate systems and controls in each of these areas. If we do not manage the growth of our business effectively, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

In addition, as our business grows, our technological and network infrastructure must keep in-line with our traffic and advertiser needs. Future demand is difficult to forecast and we may not be able to adequately handle large increases unless we spend substantial amounts to augment our ability to handle increased traffic. Additionally, the implementation of increased network capacity contains some execution risks and may lead to ineffectiveness or inefficiency. This could lead to a diminished experience for our consumers and advertisers and damage our reputation and relationship with them, leading to lower marketability and negative effects on our operating results. Moreover, the pace of innovative change in network technology is fast and if we do not keep up, we may lag behind competitors. The costs of upgrading and improving technology could be substantial and negatively affect our business, financial condition, results of operations and cash flows.


Risks Relating to our Company

We have a history of operating losses and we may not generate sufficient revenue to support our operations.

During the year ended December 31, 2018, and in each fiscal year since our inception, we have incurred net losses and generated negative cash flow from operations, resulting in an accumulated deficit of $321.2 million.

We cannot provide assurance that revenue generated from our businesses will be sufficient to sustain our operations in the long term. We have implemented measures to reduce operating costs, and we continuously evaluate other opportunities to reduce costs further. Additionally, we are working with our advisors to evaluate strategic alternatives, including the potential sale of certain non-core assets, investment assets and operating businesses; toward that end, we have entered into the VDC Transaction. However, we may need to obtain additional capital through equity financing or debt financing. Should we fail to

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successfully implement our plans described herein, such failure would have a material adverse effect on our business, including the possible cessation of operations.

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. We cannot be certain that we will be successful at raising capital, whether in an equity financing, debt financing, or by divesting of certain assets or businesses, on commercially reasonable terms, if at all. In addition, if we obtain capital by issuing equity, such transaction(s) may dilute existing stockholders.

Additionally, in connection with the VDC Acquisition, we entered into the Financing Agreement, dated as of September 24, 2015 (as amended, the “Financing Agreement”) with certain of our subsidiaries as borrowers (together with Remark, the “Borrowers”), certain of our subsidiaries as guarantors (the “Guarantors”), the lenders from time to time party thereto (the “Lenders”) and MGG Investment Group LP, in its capacity as collateral agent and administrative agent for the Lenders (“MGG”), pursuant to which the Lenders have extended credit to us a total aggregate principal amount of $35.5 million. (the “Loan”). The terms of the Financing Agreement and related documents are described in Note 11 in the Notes to Consolidated Financial Statements. The Financing Agreement contains 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. On March 15, 2019, we entered into: (i) a membership interest purchase agreement related to the proposed VDC Transaction (the “VDC Purchase Agreement”), and (ii) a letter agreement under which the Lenders agreed they are willing to forbear from taking enforcement actions under the Financing Agreement and applicable law through up to June 4, 2019 (the “March 2019 Forbearance Letter”). See Note 17 for further information regarding the VDC Purchase Agreement and the March 2019 Forbearance Letter.

On July 2, 2018, we entered into a common stock purchase agreement (the “2018 Aspire Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Aspire Capital to purchase up to an aggregate of $30.0 million of shares of our common stock over the 30-month term of the 2018 Aspire Purchase Agreement. The 2018 Aspire Purchase Agreement, which we describe in more detail in Note 14 in the Notes to Consolidated Financial Statements, terminated and replaced the common stock purchase agreement we had entered into with Aspire Capital on November 9, 2016 (the “2016 Aspire Purchase Agreement”). On March 29, 2019, we entered into a new common stock purchase agreement with Aspire Capital; such agreement is described in more detail in Item 9B of this 2018 Form 10-K and in Note 17 in the Notes to Consolidated Financial Statements.

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.


We are not in compliance with payment and certain other obligations under the Financing Agreement, constituting events of default as a result of which our obligations under the Financing Agreement, including all unpaid principal and interest, may be declared immediately due and payable.

We did not make a required prepayment of $8.0 million principal amount and $3.5 million of exit fees that was due on September 28, 2018 and have not made certain required interest payments under the Financing Agreement. Also, as of December 31, 2018, we were not in compliance with certain covenants under the Financing Agreement, including a covenant requiring us to maintain a balance of at least $2.25 million in a cash collateral account to secure our obligations under the Financing Agreement and a covenant under the Financing Agreement requiring minimum revenue from our KanKan business during the trailing nine-month period ended September 30, 2018 and the trailing twelve-month period ended December 31, 2018. These constitute events of default under the Financing Agreement. As a result of our events of default, the Lenders may declare our obligations under the Financing Agreement, including all unpaid principal and interest, due and payable immediately and exercise such other rights available to them under the Financing Agreement. As of December 31, 2018, $35.5 million of aggregate principal remained outstanding under the Loan. Our available cash and other liquid assets are not sufficient to pay such obligations in full.

We have been actively engaged in discussions with the Lenders regarding a resolution of such events of default. In connection with those discussions, the Lenders informed us that they were willing to forbear from taking enforcement actions against us under the Financing Agreement if we pursued the sale of Vegas.com. Following a sale process, on March 15, 2019, we entered into the VDC Purchase Agreement to sell all of the issued and outstanding membership interests of Vegas.com to

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VDC-MGG Holdings LLC, an affiliate of MGG and the Lenders under the Financing Agreement. In connection with our entry into the VDC Purchase Agreement, MGG provided us with the March 2019 Forbearance Letter in which MGG agreed it is willing to forbear from taking enforcement actions under the Financing Agreement and applicable law, effective on such date as we pay certain outstanding costs and expenses of the Lenders payable under the Financing Agreement, through up to June 4, 2019, on the terms and subject to the conditions set forth therein. The forbearance will expire if the VDC Purchase Agreement is terminated by either party for any reason other than for us to enter into an agreement with respect to an alternative transaction to sell all of the issued and outstanding membership interests of Vegas.com under certain limited conditions, or if we or Vegas.com breach or default under the VDC Purchase Agreement, or if we or Vegas.com fail to comply with certain restrictions with respect to cash transfers, among other things.

We cannot provide any assurance that the VDC Transaction will be completed. If MGG’s forbearance expires, the Lenders may declare our obligations under the Financing Agreement, including all unpaid principal and interest, due and payable immediately and exercise such other rights available to them under the Financing Agreement and applicable law, which could have a material adverse effect on our financial condition.


Expanding our international operations involves additional risks, and our exposure to such risks increases as our business continues to expand outside of the United States.

We operate outside of the United States in China. China has different economic conditions, languages, currency, consumer expectations, levels of consumer acceptance and use of the Internet for commerce, legislation, regulatory environments (including labor laws and customs), tax laws and levels of political stability. We are subject to associated risks typical of international businesses, including, but not limited to, the following:

Local economic or political instability;

Threatened or actual acts of terrorism;

Compliance with additional laws applicable to companies operating internationally as well as local laws and regulations, including the Foreign Corrupt Practices Act, data privacy requirements, labor and employment law, laws regarding advertisements and promotions and anti-competition regulations;

Diminished ability to legally enforce contractual rights;

Increased risk and limits on enforceability of intellectual property rights;

Restrictions on, or adverse consequences related to, the withdrawal of non-U.S. investment and earnings;

Restrictions on repatriation of cash as well as restrictions on investments in operations;

Financial risk arising from transactions in multiple currencies as well as foreign currency exchange restrictions;

Difficulties in managing staff and operations due to distance, time zones, language and cultural differences; and

Uncertainty regarding liability for services, content and intellectual property rights, including uncertainty as a result of local laws and lack of precedent.

Operating our business in China exposes us to particular risks and uncertainties relating China’s laws and regulations, some of which restrict foreign investment in businesses including Internet content providers, mobile communication and related businesses.  In addition, compliance with legal, regulatory or tax requirements in multiple jurisdictions places demands on our time and resources, and we may nonetheless experience unforeseen and potentially adverse legal, regulatory or tax consequences. In China, legal and other regulatory requirements may prohibit or limit participation by foreign businesses, such as by making foreign ownership or management of Internet businesses illegal or difficult, or may make direct participation in those markets uneconomic, which could make our entry into and expansion in those markets difficult or impossible, require that we work with a local partner or result in higher operating costs. Although we have established effective control of our Chinese business through a series of contractual arrangements, future developments in the interpretation or enforcement of Chinese laws and regulations or a dispute relating to these contractual arrangements could restrict our ability to operate or restructure our business or to engage in strategic transactions.  The success of our business in China, and of any future investments in China, is subject to risks and uncertainties regarding the application, development and interpretation of China’s laws and regulations. If

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we cannot effectively manage our China operations, our business, results of operations and financial condition could be adversely affected.

Furthermore, when we accumulate large amounts of cash in China, which we will consider indefinitely reinvested in our China operations, the repatriation of such funds for use in the United States, including for corporate purposes such as acquisitions, stock repurchases, dividends or debt refinancing, may result in additional U.S. income tax expense and higher cost for such capital.


If the Chinese government deems that the contractual arrangements in relation to our variable interest entities (“VIEs”) do not comply with its restrictions on foreign investment, or if Chinese regulations or the interpretation of existing regulations changes in the future, we could be subject to penalties or be forced to relinquish our interests in our China operations.

Various regulations in China restrict or prohibit wholly foreign-owned enterprises from operating in specified industries such as Internet information, financial services, Internet access and certain other industries. In order to comply with Chinese regulatory requirements, we conduct certain of our operations in China through contractual arrangements with our VIEs, which are incorporated in China and owned by members of our management team. These contractual arrangements are intended to give us effective control over each of the VIEs and enable us to receive substantially all of the economic benefits arising from the VIEs as well as consolidate the financial results of the VIEs in our results of operations. We expect that an increased amount of our revenue will be generated through our VIEs. Although the VIE structure we have adopted is consistent with longstanding industry practice, and has been adopted by comparable companies in China, there are substantial uncertainties regarding the interpretation and application of Chinese laws and regulations, and there can be no assurance that the Chinese government would agree that these contractual arrangements comply with China’s licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. Chinese laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.

If the VIE structure is deemed by Chinese regulators having competent authority to be illegal, either in whole or in part, we may lose control of our VIEs and have to modify such structure to comply with regulatory requirements. However, there can be no assurance that we could achieve this without material disruption to our business. Further, if the VIE structure is found to be in violation of any existing or future Chinese laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations. Furthermore, new Chinese laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our contractual arrangements with our VIEs. Occurrence of any of these events could materially and adversely affect our business, financial condition and results of operations.


Our contractual arrangements may not be as effective in providing control over the VIEs as direct ownership.

Because we are restricted or prohibited by the Chinese government from owning certain Internet operations in China, we are dependent on our VIEs, in which we have no direct ownership interest, to provide our FinTech and AI-based products and services through contractual arrangements among the parties and to hold some of our assets. These contractual arrangements may not be as effective in providing control over our operations as direct ownership of these businesses. For example, if we had direct ownership of our VIEs, we would be able to exercise our rights as a shareholder to effect changes in their boards of directors, which in turn could effect changes at the management level. Due to our VIE structure, we have to rely on contractual rights to effect control and management of our VIEs, which exposes us to the risk of potential breach of contract by the VIEs or their shareholders. In addition, as each of our VIEs is jointly owned by its shareholders, it may be difficult for us to change our corporate structure if such shareholders refuse to cooperate with us. In addition, some of our subsidiaries and VIEs could fail to take actions required for our business. Furthermore, if the shareholders of any of our VIEs were involved in proceedings that had an adverse impact on their shareholder interests in such VIE or on our ability to enforce relevant contracts related to the VIE structure, our business would be adversely affected.


Any failure by our VIEs or their shareholders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition and results of operations.

If our VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce the arrangements. We have also entered into equity

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pledge agreements with respect to each VIE to secure certain obligations of such variable interest entity or its shareholders to us under the contractual arrangements. However, the enforcement of these agreements through arbitration or judicial agencies may be costly and time-consuming and will be subject to uncertainties in China’s legal system. Moreover, our remedies under the equity pledge agreements are primarily intended to help us collect debts owed to us by the VIEs or the VIEs’ shareholders under the contractual arrangements and may not help us in acquiring the assets or equity of the VIEs.


The contractual arrangements with our VIEs may be subject to scrutiny by China’s tax authorities. Any adjustment of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated net income and the value of your investment.
       
The tax regime in China is rapidly evolving and there is significant uncertainty for Chinese taxpayers as Chinese tax laws may be interpreted in significantly different ways. China’s tax authorities may assert that we or the VIEs or their shareholders are required to pay additional taxes on previous or future revenue or income. In particular, under applicable Chinese laws, rules and regulations, arrangements and transactions among related parties, such as the contractual arrangements with our VIEs, may be subject to audit or challenge by China’s tax authorities. If China’s tax authorities determine that any contractual arrangements were not entered into on an arm's length basis and therefore constitute a favorable transfer pricing, the China tax liabilities of the relevant subsidiaries, VIEs or VIE shareholders could be increased, which could increase our overall tax liabilities. In addition, China’s tax authorities may impose interest on late payments. Our net income may be materially reduced if our tax liabilities increase. It is uncertain whether any new China laws, rules or regulations relating to VIE structures will be adopted or, if adopted, what they would provide.

If we or any of our VIEs are found to be in violation of any existing or future China laws, rules or regulations, or if we fail to obtain or maintain any of the required permits or approvals, the relevant China regulatory authorities would have broad discretion to take action in dealing with these violations or failures, including revoking the business and operating licenses of our China subsidiaries or the VIEs, requiring us to discontinue or restrict our operations, restricting our right to collect revenue, blocking one or more of our websites, requiring us to restructure our operations or taking other regulatory or enforcement actions against us. The imposition of any of these measures could result in a material adverse effect on our ability to conduct all or any portion of our business operations. In addition, it is unclear what impact Chinese government actions would have on us and on our ability to consolidate the financial results of any of our VIEs in our consolidated financial statements, if China’s governmental authorities were to find our legal structure and contractual arrangements to be in violation of China laws, rules and regulations. If the imposition of any governmental actions causes us to lose our right to direct the activities of any of our material VIEs or otherwise separate from any of these entities, and if we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIEs in our consolidated financial statements. Any of these events would have a material adverse effect on our business, financial condition and results of operations.


The shareholders, directors and executive officers of the VIEs may have potential conflicts of interest with us.
       
Our VIEs are owned by members of our management team. In addition, these individuals are also directors and officers of the VIEs. Chinese laws provide that a director and an executive officer owe a fiduciary duty to the company he or she directs or manages. The directors and executive officers of the VIEs must therefore act in good faith and in the best interests of the VIEs, and must not use their respective positions for personal gain. These laws, however, do not require them to consider the best interests of Remark when making decisions as a director or member of the management of the VIEs. Conflicts may arise between these individuals’ fiduciary duties as directors and officers of the VIEs and Remark.

Conflicts of interest may also arise due to the individuals’ roles as shareholders of the VIEs and their duties as our employees. The shareholders of the VIEs may breach, or cause the VIEs to breach, the VIE contracts. As a result, we might have to rely on legal or arbitral proceedings to enforce our contractual rights. Any failure by our VIEs or their shareholders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition and results of operations.

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Our substantial indebtedness and other payment obligations could adversely affect our financial health.

We have outstanding principal indebtedness of $35.5 million under the Loan. As of December 31, 2018, after amendments and other events described in Note 11 in the Notes to Consolidated Financial Statements, the Loan bore interest at three-month LIBOR (with a floor of 1%) plus 11% per annum, payable monthly, and had a maturity date of September 30, 2020. The Loan is secured by a first-priority lien on, and security interest in, all assets of Remark and our subsidiaries, subject to certain exceptions.

The Financing Agreement and related documents also provide for certain fees payable to the Lenders, totaling $2.25 million at December 31, 2018, and for the issuance of warrants to purchase shares of our common stock.

We also have outstanding principal indebtedness of $3.0 million under the short-term note payable described earlier in this section.

Our substantial indebtedness and other payment obligations could have important consequences to our stockholders. For example, it could:

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for working capital and general corporate purposes;

increase our vulnerability to and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

place us at a competitive disadvantage compared to our competitors that have less debt;

limit our ability to borrow additional funds; and

make us more vulnerable to a general economic downturn than a company that is less leveraged.


The Financing Agreement contains certain covenants that restrict our ability to engage in certain transactions and may impair our ability to respond to changing business and economic conditions.

The Financing Agreement, as amended, requires us to satisfy various covenants, including financial covenants with respect to quarterly earnings before interest, taxes, depreciation and amortization (“EBITDA”) levels of Vegas.com, quarterly revenue generated by KanKan and the value of our assets. The Financing Agreement also contains restrictions on our abilities to engage in certain transactions without the consent of the Lenders, and may limit our ability to respond to changing business and economic conditions. These restrictions include, among other things, limitations on our ability and the ability of our subsidiaries to:

create liens on assets to secure debt;

incur additional debt;

merge or consolidate with another company;

transfer, sell or otherwise dispose of assets;

engage in other businesses;

make investments;

enter into transactions with affiliates; and

create dividend and other payment restrictions affecting subsidiaries.



19
 



Our inability to comply with the financial covenants under the Financing Agreement may have a material adverse effect on our financial condition.
 
We are actively engaged in discussions with the Lenders regarding a resolution of the events of default under the Financing Agreement described herein. On October 16, 2018, in connection with those discussions, we agreed to increase the amount of the exit fees payable to the Lenders under the Financing Agreement by $1.0 million. Also in connection with those discussions, the Lenders have informed us that they are willing to forbear from taking any enforcement actions against us through at least December 31, 2018 if we continue to pursue certain strategic alternatives. We have engaged a financial advisor to assist us in assessing and pursuing those strategic alternatives, and we intend to continue pursuing those strategic alternatives and others, including the potential sale of certain non-core assets, investment assets and operating businesses, and to explore other alternatives for obtaining financing. We cannot provide any assurance that we will be successful in completing a strategic transaction or obtaining alternative financing, or that the Lenders will forbear from taking any enforcement actions against us. In March 2019, we entered into the VDC Transaction with an affiliate of the Lenders. See Note 17 for more information regarding subsequent events relating to the Financing Agreement.


We continue to evolve our business strategy and develop new brands, products and services, and our future prospects are difficult to evaluate.

We are in varying stages of development with regard to our business, including our artificial intelligence business driven by our KanKan Data Intelligence platform, so our prospects must be considered in light of the many risks, uncertainties, expenses, delays, and difficulties frequently encountered by companies in their early stages of development.  Some of such risks and difficulties include our ability to, among other things:
 
increase the number of users of our websites and mobile applications;

manage and implement new business strategies;

successfully commercialize and monetize our assets;

successfully attract advertisers for our owned and operated websites;

continue to raise additional working capital;

manage operating expenses;

establish and take advantage of strategic relationships;

successfully avoid diversion of management’s attention or of other resources from our existing business

successfully avoid impairment of goodwill or other intangible assets such as trademarks or other intellectual property arising from acquisitions;

prevent, or successfully temper, adverse market reaction to acquisitions;

manage and adapt to rapidly changing and expanding operations;

respond effectively to competitive developments; and

attract, retain and motivate qualified personnel.


Because of the early stage of development of certain of our business operations, we cannot be certain that our business strategy will be successful or that it will successfully address the risks described or alluded to above.  Any failure by us to successfully implement our new business plans could have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, growth into new areas may require changes to our cost structure, modifications to our infrastructure and exposure to new regulatory, legal and competitive risks.


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If we fail to manage our growth, we may need to improve our operational, financial and management systems and processes which may require significant capital expenditures and allocation of valuable management and employee resources. As we continue to grow, we must effectively integrate, develop and motivate new employees, including employees in international markets, while maintaining the beneficial aspects of our company culture. If we do not manage the growth of our business and operations effectively, the quality of our platform and efficiency of our operations could suffer, which could harm our brand, results of operations and business.

We cannot assure you that these investments will be successful or that such endeavors will result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible or that we will achieve these benefits within a reasonable period of time.


If we are not able to attract and retain key management, we may not successfully integrate acquired assets into our existing business or achieve our other business objectives.

We will depend upon the contributions of our senior management, including our Chief Executive Officer, Interim Chief Financial Officer and Vice President, Technology, for our future business success. The loss of the service of any of the key members of our senior management may significantly delay or prevent the integration of acquired assets and other business objectives.


Our investment in Sharecare’s equity securities involves a substantial degree of risk.

Our investment in Sharecare’s equity securities is illiquid and might fail to appreciate and might decline in value or become worthless. Sharecare is unlikely to pay current dividends on its equity securities, and our ability to realize a return on our investment, and recover our investment, will be dependent on Sharecare’s continued success.

Our ability to realize the value of our investment might be limited, because it is a private company. There is no public market for Sharecare’s securities, which are subject to restrictions on resale that might prevent us from selling such securities during periods in which it would be advantageous to do so. As a result, we might have to wait for a liquidity event, such as a public offering or the sale of Sharecare, to realize the value of our investment, if any.

Our equity position in Sharecare may be diluted if Sharecare issues additional equity, options, or warrants. If Sharecare makes a capital call of its existing equity holders, our position may be diluted if we choose not to contribute additional capital.


We could incur further asset impairment charges for intangible assets or other long-lived assets.

We have intangible assets and other long-lived assets, therefore future lower-than-anticipated financial performance or changes in estimates and assumptions, which in many cases require significant judgment, could result in impairment charges. We test intangible assets that are determined to have an indefinite life for impairment during the fourth quarter of each fiscal year, and assess whether factors or indicators, such as unfavorable variances from established business plans, significant changes in forecasted results or volatility inherent to external markets and industries, become apparent that would require an interim test. Adverse changes in the operating environment and related key assumptions used to determine the fair value of our indefinite lived intangible assets or declines in the value of our common stock may result in future impairment charges for a portion or all of these assets. Any further impairment charge could have a material adverse effect on our business, financial position and results of operations, but would not be expected to have an impact on our cash flows or liquidity.


Risks Relating to the Pending VDC Transaction

The announcement and pendency of the VDC Transaction, regardless of whether such transaction is consummated, may adversely affect our business.

The announcement and pendency of the VDC Transaction, regardless of whether such transaction is consummated, may adversely affect the trading price of our common stock, our business or our relationships with clients, vendors and employees. As a result of the announcement and pendency of the VDC Transaction, third parties may be unwilling to enter into material agreements with respect to our business. New or existing clients, vendors and other business partners may prefer to enter into agreements with our competitors who have not expressed an intention to sell a portion of their business because clients and

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business partners may perceive that such new relationships are likely to be more stable. In addition, pending the completion of the VDC Transaction, we may be unable to attract and retain key personnel as our employees may become concerned about the future of our business and lose focus or seek other employment. Furthermore, our management’s focus and attention and employee resources may be diverted from operational matters during the pendency of the VDC Transaction. The Purchase Agreement also imposes certain restrictions on the conduct of our business prior to the completion of the VDC Transaction, which could delay or prevent us from undertaking business opportunities that may arise pending completion of the VDC Transaction. In the event that the VDC Transaction is not completed, the announcement of the termination of the VDC Purchase Agreement may also adversely affect the trading price of our common stock, our business or our relationships with clients, vendors and employees.


If we fail to complete the VDC Transaction, our business may be harmed.

We cannot provide assurances that the VDC Transaction will be completed. The closing of the VDC Purchase Agreement is subject to a number of conditions, including but not limited to (i) our obtaining stockholder approval of the VDC Transaction, (ii) an absence of a material adverse effect on Vegas.com, (iii) Vegas.com’s purchasing at its expense a six-year tail directors’ and officers’ liability insurance policy, (iv) Vegas.com and its subsidiaries’ having at least $1.5 million in cash at closing, and (v) with respect to a certain intellectual property license agreement pursuant to which certain intellectual property is licensed to Vegas.com, execution and delivery of an assignment of such agreement by the licensor party to such agreement to the record owner of the relevant intellectual property.

We are currently in default under the Financing Agreement. In connection with the entry into the VDC Purchase Agreement, MGG provided us with the March 2019 Forbearance Letter in which MGG agreed it is willing to forbear from taking enforcement actions under the Financing Agreement and applicable law, through up to June 4, 2019, on the terms and subject to the conditions set forth therein. The forbearance will expire if the VDC Purchase Agreement is terminated by either party for any reason other than for our entry into an agreement with respect to an alternative transaction to sell all of the issued and outstanding membership interests of Vegas.com under certain limited conditions. If MGG’s forbearance expires, as a result of existing events of default under the Financing Agreement, the Lenders may declare our obligations under the Financing Agreement, including all unpaid principal and interest, due and payable immediately and exercise such other rights available to them under the Financing Agreement and applicable law, which could have a material adverse effect on our financial condition.

If the VDC Transaction is not completed, our Board, in discharging its fiduciary obligations to our stockholders, will evaluate other strategic alternatives to the VDC Transaction that may be available, which alternatives may not be as favorable to our stockholders as the VDC Transaction. Any future sale of substantially all of our assets or other transactions may be subject to further stockholder approval.

If we fail to complete the VDC Transaction, the failure to maintain existing business relationships or enter into new ones could adversely affect our business, results of operations and financial condition. The potential for loss or disaffection of employees or clients or vendors of the VDC Transaction following a failure to consummate the VDC Transaction could have a material, negative impact on the value of our business.

In addition, if the VDC Transaction is not completed, our directors, executive officers and other employees will have expended extensive time and effort and experienced significant distractions from their work during the pendency of the transaction and we will have incurred significant third-party transaction costs, in each case, without any commensurate benefit, which may have a material and adverse effect on our stock price and results of operations.


Vegas.com has historically accounted for a substantial portion of our revenue. If we complete the VDC Transaction, we will become entirely dependent on our remaining business units.

We have incurred significant operating losses since our inception. Vegas.com and its subsidiaries accounted for approximately 87%, 87% and 96% of our consolidated revenues for the years ended December 31, 2018, 2017 and 2016, respectively. If we complete the VDC Transaction, we will be exiting the Vegas.com business and we will no longer benefit from its performance. Following the VDC transaction, we will become entirely dependent upon our technology and data intelligence business and our other digital media properties. Although we expect the revenue generated from our technology and data intelligence business to grow in the future, our business will be substantially different following the VDC Transaction, and there can be no assurance that we will achieve sustained growth, achieve or sustain profitability, or generate positive cash flows from our technology and data intelligence business, or in new products or business opportunities we may pursue.


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We will be unable to compete with Vegas.com’s business for three years from the date of closing.

We have agreed that, for a period of three years after the closing of the VDC Transaction, we will not (i) directly or indirectly own, manage, operate, finance, control or knowingly participate in the ownership, management, operation, control or financing of any entity that has operations engaged, directly or indirectly, in the business of running an online agency that, through websites and mobile applications, allows users to book travel to, and lodging and entertainment in, the Las-Vegas-area market, or (ii) solicit or induce for employment, hire or otherwise retain any individual who is an employee of Vegas.com at closing and remains employed by Vegas.com following the closing. While we do not currently believe these limitations negatively affect our remaining business, the non-compete provisions will restrict our ability to engage in any business that competes with Vegas.com’s business for three years from the date of closing.


We may be exposed to litigation related to the VDC Transaction from the holders of our common stock.

Transactions such as the VDC Transaction are often subject to lawsuits by stockholders. Particularly because the holders of our common stock will not receive any consideration from the VDC Transaction, it is possible that they may sue us or our Board. Such lawsuits could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.


We may be unable to realize the benefits of our net operating loss (“NOL”) and capital loss carryforwards.

The amount of NOL and capital loss carryforwards that we have claimed have not been audited or otherwise validated by the U.S. Internal Revenue Service (the “IRS”). The IRS could challenge our calculation of the amount of our NOL and capital loss carryforwards or our determinations as to when a prior change in ownership occurred, and other provisions of the IRC may limit our ability to utilize our NOL and capital loss carryforwards to offset taxable income and capital gains. If the IRS is successful with respect to any such challenge, the tax benefit of our NOL and capital loss carryforwards to us could be substantially reduced.


Risks Relating to Our Common Stock

Our stock price has fluctuated considerably and is likely to remain volatile, and various factors could negatively affect the market price or market for our common stock.

The trading price of our common stock has been and may continue to be volatile. From January 1, 2017, through March 28, 2019, the high and low sales prices for our common stock were $15.10 and $1.05, respectively. The trading price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

general market and economic conditions;

the low trading volume and limited public market for our common stock;

minimal third-party research regarding our company; and

the current and anticipated future operating performance and equity valuation of Sharecare, in which we have a significant equity investment.

In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. Such broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.



23
 



The concentration of our stock ownership may limit individual stockholder ability to influence corporate matters.

As of March 28, 2019, our Chairman and Chief Executive Officer, Kai-Shing Tao, may be deemed to beneficially own 10,200,634 shares, or 22.6% of our common stock and Ernest T. Lee may be deemed to beneficially own 5,343,569 shares, or 13.1% of our common stock. The interests of these stockholders may not always coincide with the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders, and might affect the prevailing market price for our securities.

If these stockholders act together, they may be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate actions. Such concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock.


Sales of our common stock to Aspire Capital may cause substantial dilution to our existing stockholders and the sale of the shares of common stock acquired by Aspire Capital could cause the price of our common stock to decline.

Pursuant to the 2018 Aspire Purchase Agreement, we issued 213,574 shares of our common stock and, upon the terms and subject to the conditions and limitations set forth therein, we may sell as much as an aggregate of $30 million of our common stock to Aspire Capital from time to time over the 30-month term of the 2018 Aspire Purchase Agreement, which expires January 2, 2021. The number of shares ultimately sold to Aspire Capital is dependent upon our election to sell to Aspire Capital under the 2018 Aspire Purchase Agreement. Depending on a variety of factors, including market liquidity of our common stock, the sale of shares under the 2018 Aspire Purchase Agreement may cause the trading price of our common stock to decline.

After Aspire Capital has acquired shares under the 2018 Aspire Purchase Agreement, it may sell all, some or none of those shares. Sales to Aspire Capital pursuant to the 2018 Aspire Purchase Agreement may result in dilution to the interests of other holders of our common stock. The sale of a substantial number of shares of our common stock to Aspire Capital, or anticipation of such sales, could cause the trading price of our common stock to decline or make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise desire. However, we have the right under the 2018 Aspire Purchase Agreement to control the timing and amount of sales of our shares to Aspire Capital, and the 2018 Aspire Purchase Agreement may be terminated by us at any time at our discretion without any penalty or cost to us. As of March 28, 2019, we have sold 4,761,905 shares of common stock to Aspire Capital in exchange for $12.5 million pursuant to the 2018 Aspire Purchase Agreement.

On March 29, 2019, we entered into a new common stock purchase agreement with Aspire Capital; such agreement is described in more detail in Item 9B of this 2018 Form 10-K and in Note 17 in the Notes to Consolidated Financial Statements.


A significant number of additional shares of our common stock may be issued under the terms of existing securities, which issuances would substantially dilute existing stockholders and may depress the market price of our common stock.

As of March 28, 2019, we had outstanding stock options allowing for the purchase of as many as approximately 10.8 million shares of common stock and we had outstanding warrants to purchase 10,062,754 shares of common stock. The number of outstanding warrants include certain of the CBG Acquisition Warrants and the CBG Financing Warrants, providing for the right to purchase 40,000 and 3,312,754 shares of common stock, respectively, at per-share exercise prices of $10.00 and $4.43, respectively, and it also includes additional unissued CBG Acquisition Warrants allowing for the purchase of 5,710,000 shares of common stock at a per-share exercise price of $10.00 (we have already accounted for the liability associated with such unissued CBG Acquisition Warrants in our consolidated balance sheet as part of the line item Warrant liability). On February 21, 2018, we initiated a legal proceeding seeking, among other things, a declaration that we are not required to deliver the unissued CBG Acquisition Warrants. The parties to the proceeding entered into a Stipulation for Settlement which sets forth terms with respect to the issuance of such unissued CBG Acquisition Warrants. We describe the Stipulation for Settlement in more detail in Item 3 of this 2018 Form 10-K.

The CBG Acquisition Warrants and the CBG Financing Warrants are exercisable on a cashless basis only. As a result of the cashless exercise requirement, neither the CBG Acquisition Warrants nor the CBG Financing Warrants can be exercised for the entire amount of shares purchasable under the warrants, and they effectively cannot be exercised to purchase shares of common stock unless the applicable market value of the common stock exceeds the applicable exercise price under the terms thereof.


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The issuance of common stock pursuant to the warrants described above would substantially dilute the proportionate ownership and voting power of existing stockholders, and their issuance, or the possibility of their issuance, may depress the market price of our common stock.


Provisions in our corporate charter documents and under Delaware law could make an acquisition of Remark more difficult, which acquisition may be beneficial to stockholders.

Provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of the General Corporation Law of the State of Delaware ("DGCL"), which may discourage, delay or prevent a merger with, acquisition of or other change in control of Remark, even if such a change in control would be beneficial to our stockholders, include the following:

only our Board of Directors may call special meetings of our stockholders;

our stockholders may take action only at a meeting of our stockholders and not by written consent;

we have authorized, undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval.

Additionally, Section 203 of the DGCL prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. We have not opted out of the restriction under Section 203, as permitted under DGCL.


ITEM 1B.
UNRESOLVED STAFF COMMENTS

None


ITEM 2.
PROPERTIES

We conduct our operations primarily from leased office space located in and around the Las Vegas area. Our principal executive office is located in Las Vegas, Nevada, where we lease approximately 39,000 square feet of office space pursuant to a lease expiring in February 2024. Our Vegas.com business previously conducted its operations from approximately 33,000 square feet of leased office space located in Henderson, Nevada, pursuant to a lease expiring in September 2022; we have sublet the majority of this office space.

We primarily manage our KanKan business from our China headquarters in Chengdu, China, with support from our offices in Shanghai and Hangzhou.


ITEM 3.
LEGAL PROCEEDINGS

On February 21, 2018, we initiated a legal proceeding (the “CBG Litigation”) against CBG, Adam Roseman, and CBG’s Joint Official Liquidators (the “JOLs”)arising from the CBG Acquisition. The CBG Litigation was filed in the United States District Court for the District of Nevada and is captioned as Remark Holdings, Inc., et al. v. China Branding Group, Limited (In Official Liquidation), et al., Case No. 2:18-cv-00322. In the CBG Litigation, we are seeking a declaration from the court that we are entitled to rescission of the CBG Purchase Agreement and all transactions related to the CBG Acquisition, a declaration that the CBG Purchase Agreement and the transactions consummated pursuant thereto be rescinded and void ab initio, a declaration that we are not required to deliver the remaining CBG Acquisition Warrants allowing for the purchase of 5,710,000 shares of common stock at a per-share exercise price of $10.00, an order directing release to us of any consideration held in escrow in connection with the CBG Acquisition, and disgorgement of all consideration paid by us in connection with the CBG Acquisition. We are alleging that the defendants fraudulently mispresented and concealed material information regarding the companies we acquired in the CBG Acquisition.


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The Plaintiffs, CBG, and the JOLs entered into a Stipulation for Settlement dated January 15, 2019, which sets forth the binding terms of their settlement agreement (the “Stipulation for Settlement”). Pursuant to the Stipulation for Settlement, we shall issue fully-transferable warrants on a non-diluted basis allowing for the purchase of 5,710,000 shares of our common stock at a per-share exercise price of $6.00, which warrants are exercisable for a period of five years from the date of the Stipulation for Settlement, and which we have the right to cause the warrant holders to exercise if the closing price of our common stock is $8.00 or greater on any five non-consecutive days in any consecutive thirty-day trading window. The parties to the Stipulation for Settlement also agreed to negotiate anti-dilution provisions for the warrants. In exchange for the foregoing consideration, the parties to the Stipulation for Settlement agreed to release their claims against each other and enter into a written definitive settlement agreement. After entering into the Stipulation for Settlement, the JOLs demanded the warrants also include an exchange right. We rejected this request as it is a material term that was not included in the Stipulation for Settlement, which we believe is binding and enforceable. We filed a motion to enforce the Stipulation for Settlement on March 12, 2019, and intend to vigorously protect our rights thereunder. Mr. Roseman’s motion to dismiss was granted in part on March 27, 2019, with the Court granting the Plaintiffs leave to file an amended complaint on or before April 9, 2019. The motion to dismiss filed by CBG and the JOLs remains pending before the Court.


ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable



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PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Our common stock is listed on the NASDAQ Capital Market under the symbol MARK.


HOLDERS OF COMMON STOCK

We had approximately 99 holders of record of our common stock as of March 28, 2019.


DIVIDENDS

We have never declared or paid dividends or distributions on our common equity. We currently intend to retain all available funds and any future consolidated earnings to fund our operations and continue the development and growth of our business; therefore, we do not anticipate paying any cash dividends.


UNREGISTERED SALES OF EQUITY SECURITIES

On November 2, 2018, we sold 200,000 shares to an accredited investor in a private placement for $0.5 million. On December 4, 2018, we sold an aggregate of 2,384,616 shares to accredited investors in private placements for an aggregate of $3.1 million.

We made the offers and sales of securities in the above-described private placements in reliance upon an exemption from registration requirements pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended, based upon representations made to us by the investors in purchase agreements we entered into with the investors.


ITEM 6.
SELECTED FINANCIAL DATA

Not applicable


ITEM 7.
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 year ended December 31, 2018 in conjunction with our consolidated financial statements and notes thereto set forth in Part II, Item 8 of this 2018 Form 10-K.  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 Business, Risk Factors and Special Note Regarding Forward-Looking Statements in this 2018 Form 10-K.


OVERVIEW

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


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

We also own and operate Vegas.com, an online agency catering to the travel and entertainment needs of visitors to the Las Vegas area and those of Las Vegas locals. Our Travel & Entertainment segment generates transaction services revenue from sales of travel and entertainment products, such as show tickets and hotel rooms. See Note 17 in Notes to Consolidated Financial Statements for more information regarding subsequent events relating to our Travel and Entertainment segment.

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

The following table presents our revenue categories as a percentage of total consolidated revenue during the years ended December 31, 2018 and 2017.
 
Year Ended December 31,
 
2018
 
2017
Transaction services
82
%
 
81
%
Data platform services
10
%
 
8
%
Advertising and other
8
%
 
11
%


Our Travel & Entertainment segment experienced a record number of transactions during 2018. Such activity, a large portion of which resulted from significant improvement in conversion rates related to entertainment bookings, gives us confidence that our strategy of gaining market share in the entertainment market by continuing to invest in technology and marketing is succeeding. As we have previously noted, we continue to focus on expanding our presence on mobile devices and improving the user experience on our mobile online offerings, and will also continue making changes to our desktop experience such as those that led to our improved conversion rates.

We recognized revenue during the year ended December 31, 2018 from creating and deploying several projects. We are currently passing proof-of-concept tests and beginning deployment and implementation on additional AI projects. We will continue to accelerate our development and deployment of products and services built upon our KanKan data and AI platform, and we expect our operating expenses to increase in line with such activity.

Revenue from our FinTech services, which represents commissions we earn for providing high-quality loan candidates to our customers, was impacted by the industry-wide regulatory audit in China. After January 2018, due to the regulatory changes resulting from the audit, we ceased providing such services under our then-existing FinTech contracts that gave rise to Reimbursement Obligations (see Note 2 in the Notes to Consolidated Financial Statements for more information).


Matters Affecting Comparability of Results

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 year ended December 31, 2017 were reclassified to conform to the current presentation as of December 31, 2018.



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CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of our results of operations and liquidity and capital resources is based upon our financial statements. We prepare our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain of our accounting policies require that we apply significant judgment in determining the estimates and assumptions for calculating estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We use, in part, our historical experience, terms of existing contracts, observance of trends in the industry and information obtained from independent valuation experts or other outside sources to make our judgments. We cannot assure you that our actual results will conform to our estimates. We regularly evaluate these estimates and assumptions, particularly in areas we consider to be critical accounting estimates, where changes in estimates and assumptions could have a material impact on our results of operations, financial position and, generally to a lesser extent, cash flows.

Senior management and the Audit Committee of the Board of Directors have reviewed the disclosures included herein about our critical accounting estimates, and have reviewed the processes to determine those estimates.


Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the period. Estimates incorporated into our consolidated financial statements include the estimated useful lives for depreciable and amortizable assets, the fair value of the derivative and non-derivative liabilities related to certain stock warrants we issued, the fair value of stock options issued under our equity incentive plans, the estimated cash flows we use in assessing the recoverability of long-lived assets, and the estimated fair values we use when indicators suggest the need to quantitatively test goodwill for impairment. Actual results could differ from those estimates.


Business Combinations

We include the results of operations of the businesses that we acquire as of the respective dates of acquisition. We allocate the purchase price of our acquisitions to the identifiable tangible and intangible assets acquired and liabilities assumed based on the estimated fair values of such assets and liabilities, with the excess of the fair value of purchase price over the fair values of these identifiable assets and liabilities recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets.

Critical estimates in valuing certain intangible assets include, but are not limited to, the future expected cash flows resulting from customer relationships and from the use of domain names, the amount of hypothetical royalty income that could be generated if trademarks and trade names were licensed from an independent third party, as well as discount rates. We base estimates of fair value upon assumptions we believed to be reasonable, but which are inherently uncertain and unpredictable; therefore, actual results may differ from our estimates.


Accounting for Share-Based Compensation

For grants of restricted stock or restricted stock units, we measure fair value using the closing price of our stock on the measurement date, while we use the Black-Scholes-Merton option pricing model (the “BSM Model”) to estimate the fair value of stock options and similar instruments awarded.

The BSM Model requires the following inputs:

Expected volatility of our stock price. We analyze the historical volatility of our stock price utilizing daily stock price returns, and we also review the stock price volatility of certain peers. Using the information developed from such analysis and our judgment, we estimate how volatile our stock price will be over the period we expect the stock options will remain outstanding.


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Risk-free interest rate. We estimate the risk-free interest rate using data from the Federal Reserve Treasury Constant Maturity Instruments H.15 Release (a table of rates downloaded from the Federal Reserve website) as of the valuation date for a security with a remaining term that approximates the period over which we expect the stock options will remain outstanding.

Stock price, exercise price and expected term. We use an estimate of the fair value of our common stock on the measurement date, the exercise price of the option, and the period over which we expect the stock options will remain outstanding.


We do not currently issue dividends, but if we did so, then we would also include an estimated dividend rate as an input to the BSM model. Generally speaking, the BSM model tends to be most sensitive to changes in stock price, volatility or expected term.

We measure compensation expense as of the grant date for granted equity-classified instruments and as of the settlement date for granted liability-classified instruments (meaning that we re-measure compensation expense at each balance sheet date until the settlement date occurs).

Once we measure compensation expense, we recognize it over the requisite service period (generally the vesting period) of the grant, net of forfeitures as they occur.


Liabilities Related to Warrants Issued 

We record certain common stock warrants we issued (see Note 4 in Notes to Consolidated Financial Statements for more detailed information) at fair value and recognize the change in the fair value of such warrants as a gain or loss which we report in the Other income (expense) section in our consolidated statement of operations. We report some of the warrants that we record at fair value as liabilities because they contain certain provisions allowing for reduction of their exercise price, while others are recorded as liabilities because they contain a conditional promise to issue a variable number of our common stock shares upon the warrants’ expiration, and the monetary amount of such obligation was fixed at the inception of the contract.

We estimate the fair value of the warrants using the Monte Carlo Simulation method. The Monte Carlo Simulation method uses many of the same types of estimated inputs, such as the expected volatility of our stock price, the risk-free interest rate and the expected term of the warrant, as the BSM Model that we use to estimate the fair value of stock options that we issue.


Impairments

Long-Lived Assets Other Than Indefinite-Lived Intangible Assets. When events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, we evaluate long-lived assets for potential impairment. We estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition and, if the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, we recognize an impairment loss for the difference between the carrying value of the asset and its fair value.

Goodwill and Indefinite-Lived Intangible Assets. When testing for impairment, we first evaluate qualitative factors to determine whether events and circumstances indicate that, more likely than not, an indefinite-lived intangible asset is impaired. If, after evaluating the totality of events and circumstances and their potential effect on significant inputs to the fair value determination, we determine that, more likely than not, an indefinite-lived intangible asset is impaired, we then quantitatively test for impairment.

Investment. We routinely perform an assessment of our investments in Sharecare, Inc. (“Sharecare”) and in Beijing All-in-one Cloud Net Technology, Co. Ltd. (“AIO”) to determine if they are other-than-temporarily impaired. An investment is impaired when the fair value of the investment declines to an amount less than the cost or amortized cost of that investment. As part of our assessment process, we determine whether the impairment is temporary or other-than-temporary. We base our assessment on both quantitative criteria and qualitative information, considering a number of factors including, but not limited to how long the security has been impaired, the amount of the impairment, the financial condition and near-term prospects of

30


the issuer, whether the issuer is current on contractually-obligated interest and principal payments, key corporate events pertaining to the issuer and whether the market decline was affected by macroeconomic conditions.

If we determine that an investment has incurred an other-than-temporary impairment, we permanently reduce the cost of the security to fair value and recognize an impairment charge in our consolidated statements of operations.


Recently Issued Accounting Pronouncements 

Please refer to Note 2 in the Notes to Consolidated Financial Statements included in this report for a discussion regarding recently issued accounting pronouncements which may affect us.


RESULTS OF OPERATIONS

The following discussion summarizes our operating results for the year ended December 31, 2018 compared to the year ended December 31, 2017


Reportable Segment Results

Travel and Entertainment
 
 
Year Ended December 31,
 
Change
 
 
2018
 
2017
 
Dollars
 
Percentage
Revenue
 
$
69,057

 
$
61,543

 
$
7,514

 
12
 %
 
 
 
 
 
 
 
 
 
Cost of revenue
 
11,725

 
10,768

 
957

 
9
 %
Sales and marketing
 
34,083

 
30,200

 
3,883

 
13
 %
Technology and development
 
8,939

 
8,144

 
795

 
10
 %
General and administrative
 
4,823

 
4,980

 
(157
)
 
(3
)%
Depreciation and amortization
 
8,786

 
8,473

 
313

 
4
 %
Other operating expenses
 
954

 
783

 
171

 
22
 %
Total cost and expenses
 
69,310

 
63,348

 
5,962

 
9
 %


Revenue. We continue to experience increased conversion of traffic through our sales channels. The increased transactions, as well as a shift in product mix to higher-margin products, lead to an increase in services revenue during the year ended December 31, 2018 of $9.4 million.
 
The increased revenue from transaction growth was partially offset by a decrease of approximately $1.2 million from hotel transactions resulting from lower average purchase prices due to market conditions.

We do not currently sell advertising on mobile devices, so the movement of online traffic from desktop devices to mobile devices caused a decline in advertising revenue during the year ended December 31, 2018 of approximately $0.4 million, which also partially offset the increased revenue from transaction growth. Various immaterial declines in other revenue categories also contributed to offsetting of the increase resulting from show ticket sales.



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Cost of revenue. For our travel and entertainment segment, cost of revenue consists mainly of credit card fees we incur when customers book travel or entertainment through our sales channels. Such costs increased by approximately $0.7 million in conjunction with the increase in transactions.


Sales and marketing. The increase in our sales and marketing expense in the travel and entertainment segment was driven primarily by a $4.3 million increase in paid search marketing cost at Vegas.com. The increases resulted from the competitive nature of the paid search marketplace. The increases in conversion of traffic allowed Vegas.com to spend more in paid search to increase market share, which resulted in more transactions and increased revenue. The increased expense was partially offset by a $0.4 million decrease in contract labor and other marketing expenses.


Technology and development. The increase in our technology and development expense in the travel and entertainment segment was driven primarily by a $0.6 million increase in payroll-related costs related to our technology staff due to annual salary increases and a decrease in payroll-related costs being capitalized to projects. The inclusion of stock-based compensation expense within the segment contributed an additional increase in expense of $0.2 million. During the year ended December 31, 2017, stock-based compensation was reported within the non-reportable-segment business as part of our Corporate Entity.


Technology and Data Intelligence
 
 
Year Ended December 31,
 
Change
 
 
2018
 
2017
 
Dollars
 
Percentage
Revenue
 
$
8,030

 
$
5,744

 
$
2,286

 
40
 %
 
 
 
 
 
 
 
 
 
Cost of revenue
 
11,637

 
4,997

 
6,640

 
133
 %
Sales and marketing
 
1,200

 
359

 
841

 
234
 %
Technology and development
 
3,955

 
2,414

 
1,541

 
64
 %
General and administrative
 
2,208

 
800

 
1,408

 
176
 %
Depreciation and amortization
 
653

 
520

 
133

 
26
 %
Other operating expenses
 
129

 
287

 
(158
)
 
(55
)%
Total cost and expenses
 
19,782

 
9,377

 
10,405

 
111
 %


Revenue. Revenue resulting from AI projects increased by $2.8 million as a result of passing proof-of-concept tests on several 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. Partially offsetting the increase in revenue from AI projects was a decrease of $0.5 million in FinTech revenue as a result of discontinuing services under existing FinTech contracts due to regulatory changes resulting from the industry-wide audit in China.

Cost of revenue. The increase in our cost of revenue resulted from equipment purchases and software development related to completed projects. Some of such projects, described above, supported the increases in our data platform services revenue. We also completed two fully-integrated AI solutions for which we have fully performed under the agreement and title to the product passed to our customer, so we have recognized cost of revenue of $4.0 million; however, we have not recognized the $4.6 million of revenue from such projects due to uncertainty regarding the timing of collection of amounts payable to us under the agreement. The uncertainty regarding the timing of collection prevents us from determining that collectibility of all amounts payable to us under the agreements is probable, resulting in a timing difference between recognition of cost and recognition of revenue.

Sales and marketing. Costs related to traveling and attending conferences to meet with clients and potential clients increased by $0.5 million as we increased our efforts to market our increasing portfolio of products. Additionally, payroll-related

32


costs related to our sales staff in the Technology and Data Intelligence segment increased $0.3 million primarily as a result of increased sales staff.

Technology and development. Payroll-related costs related to our technology staff in the Technology and Data Intelligence segment increased $1.9 million. The increase included $1.4 million in personnel added during the year which consisted primarily of technology-focused employees to accelerate product development and support an increased number of our projects in the proof-of-concept phase, and $0.5 million less in payroll-related costs being capitalized to projects. The increase in payroll-related costs was partially offset by a decrease of $0.5 million in stock-based compensation expense which resulted due to the decline in the price of our common stock causing us to reduce our estimate of the fair value of the liability-classified awards we grant to employees based in China.

General and administrative. Employee costs related to our administrative staff increased $0.5 million primarily due to compensation expense for our Vice President, Technology , who is primarily responsible for oversight of KanKan, as well as the expenses associated with his travel between our corporate headquarters and Chengdu offices. Stock-based compensation expense increased $0.3 million, because it was reported within the non-reportable-segment business as part of our Corporate Entity in the prior year. Facilities and consulting fees further increased by $0.4 million as we expanded our operations.






Consolidated Results
 
 
Year Ended December 31,
 
Change
 
 
2018
 
2017
 
Dollars
 
Percentage
Revenue
 
$
79,110

 
$
70,601

 
$
8,509

 
12
 %
 
 
 
 
 
 
 
 
 
Cost of revenue
 
24,628

 
16,909

 
7,719

 
46
 %
Sales and marketing
 
38,391

 
33,252

 
5,139

 
15
 %
Technology and development
 
13,332

 
11,642

 
1,690

 
15
 %
General and administrative
 
33,344

 
19,391

 
13,953

 
72
 %
Depreciation and amortization
 
10,875

 
11,070

 
(195
)
 
(2
)%
Impairments
 
2,209

 
14,646

 
(12,437
)
 
(85
)%
Other operating expenses
 
1,084

 
1,070

 
14

 
1
 %
Total cost and expenses
 
123,863

 
107,980

 
15,883

 
15
 %
 
 
 
 
 
 
 
 
 
Interest expense
 
(6,491
)
 
(4,645
)
 
(1,846
)
 
40
 %
Other income, net
 
282

 
23

 
259

 
1,126
 %
Change in fair value of warrant liability
 
27,879

 
(64,139
)
 
92,018

 
(143
)%
Other gain (loss)
 
858

 
(317
)
 
1,175

 
(371
)%
Total Other expense
 
22,528

 
(69,078
)
 
91,606

 
(133
)%


Consolidated results of operations were primarily impacted by the results of operations of our reportable segments, as described above.



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Revenue. In addition to the changes discussed in our reportable segments, the revenue reported by our Remark Entertainment business (formerly referred to as our Fanstang business) decreased by $1.0 million primarily due to contracts for live broadcast events and sponsorships that expired in the prior year and have not been renewed.


Technology and development. All our stock-based compensation expense, including the $0.7 million related to our China-based technology staff, was recorded at the corporate entity in 2017. In 2018, stock-based compensation related to our China-based technology staff was recorded in the Technology and Data Intelligence segment.


General and administrative. The increase in general and administrative expense incurred by our non-reportable-segment businesses was affected by the following:

In January 2018, we immediately recognized $11.6 million of stock-based compensation expense related to a grant of an option to purchase 1.3 million shares of our common stock at an exercise price of $7.81 per share to our Chief Executive Officer. The effect of that single award was partially offset by differences in the amount and timing of stock option grants to other employees, resulting in a net increase of $9.1 million in stock-based compensation expense.

During the first quarter of 2018, we determined that we would no longer use certain leased office space and, as a result, we sublet the majority of such office space to third parties. As a result of our decision, we recognized $2.3 million of rent expense and an associated liability for early lease termination. No similar transactions occurred during the same period of the prior year.

Our increased use of consultants for certain new strategic and administrative projects, primarily one to enhance the rigor of our global Sarbanes-Oxley compliance program, added $1.1 million more than in the same period of the prior year.

Legal expense increased approximately $0.3 million, primarily as a result of litigation work related to the CBG Acquisition and contract review and translation services related to the increased number of contracts related to our business in China.


Depreciation and amortization. Impairments in 2017 of certain intangible assets resulted in $0.4 million less amortization in 2018, while several software assets became fully amortized during the first three quarters of 2018, resulting in $0.3 million less amortization in 2018.


Impairments. During the fourth quarter of 2017, we recognized losses of $5.8 million and $8.8 million on impairments of long-lived intangible assets and goodwill, respectively, which we acquired in the CBG Acquisition. During 2018, we recorded a $0.6 million impairment of the remaining long-lived intangible asset which we acquired in the CBG Acquisition, while our sale of substantially all remaining assets of Banks.com resulted in a $1.6 million impairment loss related to goodwill.


Interest expense. In October 2018, we agreed to increase the amount of the exit fees payable to the Lenders under the Financing Agreement by $1.0 million, an amount we accrued as interest expense. The remaining increase in interest expense was the result of amortization of discount on our debt. We accounted for the amendments to the Financing Agreement executed since October 2017 as debt modifications, adding $2.5 million to the amount of discount on our debt in the form of additional fees.


Other gain (loss). During June 2018 we sold the IRS.com domain and in December 2018 we sold the Banks.com domain, resulting in gains of $0.6 million and $0.4 million, respectively.


Change in fair value of warrant liability. The fair value of our warrant liability maintains a direct relationship with the price of our common stock, such that the significant decrease in our common stock price between December 31, 2017 and December 31, 2018 resulted in a $27.9 million decrease in the fair value of our warrant liability. Additionally, the fair value of our warrant liability decreased by $59.9 million in January 2018 as a result of the warrant exercises and warrant calls described in Note 4 in the Notes to Consolidated Financial Statements.

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LIQUIDITY AND CAPITAL RESOURCES
 
Overview
 
During the year ended December 31, 2018, and in each fiscal year since our inception, we have incurred net losses and generated negative cash flow from operations, resulting in an accumulated deficit of $321.2 million and a cash and cash equivalents balance of $14.4 million, both amounts as of December 31, 2018. Our net revenue during the year ended December 31, 2018 was $79.1 million.
 
We are a party to the Financing Agreement, pursuant to which the Lenders have extended credit to the Borrowers consisting of the Loan in the aggregate principal amount of $35.5 million. As of December 31, 2018, the Loan bore interest at three-month LIBOR (with a floor of 1%) plus 11% per annum, payable monthly, and had a maturity date of September 30, 2020. The material terms of the Financing Agreement, the amendments thereto, and related documents effective as of December 31, 2018 are described in Note 11 in the Notes to Consolidated Financial Statements. As of December 31, 2018, $35.5 million of aggregate principal remained outstanding under the Loan, which bore an applicable interest rate of approximately 13% per annum. Our available cash and other liquid assets are not sufficient to pay our obligations under the Financing Agreement in full.

Pursuant to the Fourth Financing Amendment dated as of April 30, 2018, the Borrowers agreed to make a prepayment of $8.0 million principal amount outstanding and $3.5 million of exit fees under the Financing Agreement within 60 days following the date of the Fourth Financing Amendment. Pursuant to the Fifth Financing Amendment dated as of June 29, 2018, the Lenders agreed, among other things, to extend the due date of the prepayments and fees required by the Fourth Financing Amendment for up to three months, provided that we made extension payments on the first business day of each such month. The extension payments were $250,000 for each of the first two months and $500,000 for the third month, with the final extension period ending on September 28, 2018. We made the extension payments required by the Fifth Financing Amendment to extend the payment date to September 28, 2018; however, we did not make the payments required on such date, which constitutes an event of default under the Financing Agreement. As a result of the default, from September 28, 2018, the Loan bore interest at the interest rate described above.

The Financing Agreement also contains certain affirmative and negative covenants, including but not limited to financial covenants with respect to quarterly EBITDA levels and the value of our assets. As of December 31, 2018 and September 30, 2018, we were not in compliance with the covenants under the Financing Agreement requiring minimum revenue from our KanKan business during the year ended December 31, 2018 of $25.0 million and during the trailing nine month period ended September 30, 2018 of $12.6 million, as actual revenue from our KanKan business during such periods was $8.0 million and $5.6 million, respectively. Our non-compliance with such covenants constitute events of default under the Financing Agreement.

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

On October 16, 2018, in connection with our discussions with Lenders regarding a resolution of the events of default then existing under the Financing Agreement described herein, we agreed to increase the amount of the exit fees payable to the Lenders under the Financing Agreement by $1.0 million. On March 15, 2019, and as described in Note 17 in the Notes to Consolidated Financial Statements, MGG provided us with the March 2019 Forbearance Letter in which MGG agreed it is willing to forbear from taking enforcement actions under the Financing Agreement and applicable law, effective on such date as we pay certain outstanding costs and expenses of the Lenders payable under the Financing Agreement, through up to June 4, 2019. Additionally, in connection with our entry into the VDC Purchase Agreement, we are in discussions with MGG regarding an amendment to the Financing Agreement, anticipated to be entered into at the closing of the VDC Transaction.

On September 24, 2015, concurrently with the closing of the VDC Acquisition, Vegas.com entered into a Letter of Credit Facility Agreement with Bank of America, N.A., which currently expires on May 31, 2019, providing for a letter of credit facility with up to $9.3 million of availability. On November 27, 2018, we amended the Letter of Credit Facility Agreement to increase the facility’s availability to $11.0 million. Amounts available under the letter of credit facility are subject to customary fees and are secured by a first-priority lien on, and security interest in, a cash collateral account with the bank containing cash

35


equal to 101.25% of the aggregate outstanding undrawn face amount of all letters of credit under the letter of credit facility outstanding.

On April 12, 2017, we issued a short-term note payable in the principal amount of $3.0 million to a private lender in exchange for cash in the same amount. The agreement, which does not have a stated interest rate, required us to repay the note plus a fee of $115 thousand on the maturity date of June 30, 2017. The note is accruing interest at $500 per day on the unpaid principal until we repay the note in full.

Pursuant to the terms of the purchase agreement we entered into in connection with the VDC Acquisition, we are obligated to make an Earnout Payment based upon the performance of Vegas.com in the year ended December 31, 2018. The $1.0 million Earnout Payment will be due in the second quarter of 2019.

On November 9, 2016, we entered into the 2016 Aspire Purchase Agreement with Aspire Capital, which provided that, upon the terms and subject to the conditions and limitations set forth therein, we had the right to direct Aspire Capital to purchase up to an aggregate of $20.0 million of shares of our common stock over the 30-month term of the 2016 Aspire Purchase Agreement. Purchases under the 2016 Aspire Purchase Agreement were made at prices calculated in accordance with the terms of the 2016 Aspire Purchase Agreement at the time of our submission to Aspire Capital of a purchase notice specifying such number of shares to be purchased, subject to maximum dollar and share amounts for sales on any one date unless the parties mutually agreed otherwise. Additionally, the total number of shares issuable pursuant to the 2016 Aspire Purchase Agreement was limited to 4,273,411 shares (the “2016 Aspire Exchange Cap”), or 19.99% of our shares of common stock outstanding as of the date of the 2016 Aspire Purchase Agreement, unless stockholder approval was obtained in accordance with the rules of the Nasdaq Stock Market. If stockholder approval was not obtained, such limitation would not apply after the 2016 Aspire Exchange Cap was reached if at all times thereafter the average purchase price paid for all shares issued under the 2016 Aspire Purchase Agreement was equal to or greater than $3.96 per share. As of the termination of the 2016 Aspire Purchase Agreement effective July 2, 2018, we had issued the maximum number of shares issuable within the 2016 Aspire Exchange Cap, including 4,121,896 shares purchased by Aspire Capital for an aggregate purchase price of $12.8 million and 151,515 shares issued to Aspire Capital upon executing the 2016 Aspire Purchase Agreement. As of July 2, 2018, we had not obtained stockholder approval and we were able to make subsequent issuances under the 2016 Aspire Purchase Agreement only if and to the extent that following such issuance the average purchase price paid was equal to or greater than $3.96 per share.

On July 2, 2018, we entered into the 2018 Aspire Purchase Agreement with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Aspire Capital to purchase up to an aggregate of $30.0 million of shares of our common stock over the 30-month term of the 2018 Aspire Purchase Agreement. Purchases under the 2018 Aspire Purchase Agreement, which is described in more detail in Note 14 in the Notes to Consolidated Financial Statements, are made at prices calculated in accordance with the terms of the 2018 Aspire Purchase Agreement at the time of our submission to Aspire Capital of a purchase notice specifying such number of shares to be purchased, subject to maximum dollar and share amounts for sales on any one date unless the parties mutually agree otherwise. Additionally, the total number of shares that may be issued pursuant to the 2018 Aspire Purchase Agreement is limited to 6,629,039 shares (the “2018 Aspire Exchange Cap”), which represents 19.99% of our shares of common stock outstanding as of the date of the 2018 Aspire Purchase Agreement, unless stockholder approval is obtained in accordance with the rules of the Nasdaq Stock Market. If stockholder approval is not obtained, such limitation will not apply after the 2018 Aspire Exchange Cap is reached if at all times thereafter the average purchase price paid for all shares issued under the 2018 Aspire Purchase Agreement is equal to or greater than $3.91 per share. As of December 31, 2018, we have issued to Aspire Capital a total of 3,308,812 shares of our common stock under the 2018 Aspire Purchase Agreement, including 3,095,238 shares purchased by Aspire Capital for an aggregate purchase price of $10.0 million, and 213,574 shares issued to Aspire Capital upon executing the 2018 Aspire Purchase Agreement. As of December 31, 2018, we had not obtained stockholder approval and we were able to issue to Aspire Capital up to a maximum of 3,320,227 additional shares under the 2018 Aspire Purchase Agreement, unless and to the extent that following such issuance the average purchase price paid was equal to or greater than $3.91 per share.

On March 29, 2019, we entered into a common stock purchase agreement (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. Purchases under the 2019 Aspire Purchase Agreement, which is described in more detail in Item 9B in this 2018 Form 10-K and in Note 17, 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 mut

36
 



ually agree otherwise. Additionally, the total number of shares that may be issued pursuant to the 2019 Aspire Purchase Agreement is limited to 8,140,373 shares (the “2019 Aspire Exchange Cap”), which represents 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 2019 Aspire 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 the potential sale of certain non-core assets, investment assets and operating businesses. However, we may need to obtain additional capital through equity financing or debt financing.

Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions, will play primary roles in determining whether we can successfully obtain additional capital. Additionally, pursuant to the Financing Agreement, we are subject to certain limitations on our ability and the ability of our subsidiaries to, among other things, incur additional debt and transfer, sell or otherwise dispose of assets, without the consent of the Lenders. We cannot be certain that we will be successful at raising additional capital.

A variety of factors, many of which are outside of our control, affect our cash flow; those factors include regulatory issues, competition, financial markets and other general business conditions. Based on financial projections, we believe that we will be able to meet our ongoing requirements for at least the next 12 months following this report, (including repayment of our existing debt as it matures) with existing cash, cash equivalents and cash resources, and based on the probable success of one or more of the following plans:

monetize existing assets

work with our creditors to modify existing arrangements or refinance our debt

obtain additional capital through equity issuances, including but not limited to under the 2018 Aspire Purchase Agreement and 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 April 1, 2020.
 

Cash Flows - Operating Activities
 
We used $7.7 million more cash from operating activities during the year ended December 31, 2018 than we did during the year ended December 31, 2017. The increase in cash used in operating activities is a result of an increase in operating losses, including the increase in our operations in China (which included increasing payroll costs); paying security deposits related to our travel and entertainment business; increasing the use of consultants for certain new strategic and administrative projects (primarily one to enhance the rigor of our global Sarbanes-Oxley compliance program) and the timing of payments related to elements of working capital.


Cash Flows - Investing Activities
 
During the year ended December 31,2018, we received approximately $1.1 million upon the sales of the IRS.com and Banks.com web domains. The proceeds from such sales were almost entirely offset by our payment of $0.5 million towards our

37
 



investment in AIO (see Note 6 in the Notes to Consolidated Financial Statements for more details) and by a reduction of $0.5 million in capital expenditures.


Cash Flows - Financing Activities

During the year ended December 31, 2018, our financing activities provided $11.4 million less from the issuance of shares of our common stock, including from stock option exercises, than during the same period of 2017. During 2018 we also paid approximately $1.5 million in loan fees related to our debt modifications, as well as $2.3 million of exit fees to the Lenders as described in Note 11 in the Notes to Consolidated Financial Statements. In 2017, we received $3.0 million from the issuance of debt, while no such transactions occurred in 2018.


Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.


ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable


ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

We have included the required financial statements and schedules in this 2018 Form 10-K beginning on page F-1.


ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None


ITEM 9A.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to provide reasonable assurance that the information we must disclose in reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We designed our disclosure controls with the objective of ensuring we accumulate and communicate this information to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under Exchange Act, as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that, due to the identification of the material weaknesses in our internal control over financial reporting as further described below, our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2018. Notwithstanding the material weaknesses in our internal control over financial reporting, the consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.



38
 



Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018 based on the framework set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Our internal control over financial reporting includes those policies and procedures that: (a) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.

A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. Management identified material weaknesses related to the sufficiency of documentation of review and approval of manual journal entries. Specifically, we failed to retain documentary evidence that we had reviewed underlying information at a sufficient level of detail. As a result, we are unable to demonstrate our effective review prior to approval of manual journal entries. Management also identified a material weakness related to insufficient documentation of our consideration of appropriate revenue recognition criteria for certain contracts arising from our Technology and Data Intelligence segment. As a result, there is a risk that we could misapply the new revenue recognition guidance and improperly recognize revenue.

During our fourth quarter of 2018 evaluation, management concluded that we did not select and develop control activities that contributed to the mitigation of risks to acceptable levels, as required by the control activities component of the COSO framework, including the documentation of appropriate review and approval of manual journal entries, our consideration of appropriate revenue recognition criteria for certain contracts arising from our Technology and Data Intelligence segment, and our monitoring and activity-level controls specific to various business processes within our Technology and Data Intelligence segment. The failure to retain appropriate documentation of our review and approval of manual journal entries has a pervasive impact and, as such, this deficiency resulted in a risk that could have impacted virtually all financial statement account balances and disclosures. Regarding our Technology and Data Intelligence segment, the failure to document consideration of appropriate revenue recognition for certain contracts resulted in a risk that could have materially impacted revenue and cost of sales, while we noted deficiencies in our monitoring and activity-level controls related to processes including accounts payable, accrued liabilities, payroll and fixed assets. The deficiencies in the various business processes aggregate to a material weakness.

Based upon our evaluation, our management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2018.


Changes in Internal Control over Financial Reporting

Except for the identified material weaknesses, there was no change in our internal control over financial reporting during the fiscal quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Remediation Efforts to Address the Material Weakness

We are committed to maintaining a strong internal control environment and will make remediation efforts to improve our controls. With the oversight of senior management, subsequent to December 31, 2018, a plan to remediate the underlying causes of the material weaknesses and improve the design and operating effectiveness of internal control over financial reporting and our disclosure controls has been developed and is being implemented. We expect that the remediation of the material weakness will be completed prior to the end of second quarter 2019.

39




Report of Independent Registered Public Accounting Firm


To the Board of Directors and Stockholders of
Remark Holdings, Inc.

Adverse Opinion on Internal Control over Financial Reporting
We have audited Remark Holdings, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weaknesses described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by COSO.

A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. There is a material weakness related to the design and operating effectiveness of the Company’s controls over the review and approval over the preparation of manual journal entries, which impacts various areas including but not limited to revenue recognition, accounts payable and accrued expenses, relative to its internal control over financial reporting. In addition, we noted a material weakness related to the design and operating effectiveness of the Company’s internal controls over revenue recognition in China. We also identified deficiencies related to the adequacy of the Company’s monitoring and activity level controls specific to various business processes in China, including accounts payable, accrued liabilities, payroll, and fixed assets. These deficiencies aggregate to a material weakness. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report dated April 1, 2019, on those consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows of the Company, and our report dated April 1, 2019, expressed an unqualified opinion with an explanatory paragraph regarding substantial doubt about the Company’s ability to continue as a going concern.


Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.


Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are

40


recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Disclaimer on Additional Information in Management’s Report
We do not express an opinion or any other form of assurance on management’s statements, included in the accompanying Management’s Report on Internal Control over Financial Reporting, referring to corrective actions taken after December 31, 2018, relative to the aforementioned material weaknesses in internal control over financial reporting.


/s/ Cherry Bekaert LLP
    
Atlanta, Georgia
April 1, 2019


ITEM 9B.
OTHER INFORMATION

New Common Stock Purchase Agreement

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. Upon the satisfaction of certain commencement conditions set forth in the 2019 Aspire Purchase Agreement, the 2019 Aspire Purchase Agreement will replace the 2018 Aspire Purchase Agreement, which will terminate under the terms of the 2019 Aspire Purchase Agreement. In consideration for entering into the 2019 Aspire Purchase Agreement, upon commencement of the 2019 Aspire Purchase Agreement, we will issue to Aspire Capital $0.9 million of shares of our common stock.

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.

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

41



In addition, Aspire Capital will not be required to buy any shares of our common stock pursuant to a Purchase Notice on any trading day on which the 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 “2019 Aspire 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 2019 Aspire 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.



42
 


PART III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

We incorporate the information this item requires by referring to the information under the captions Proposal No. 1: Election of Directors and Corporate Governance in our proxy statement for our 2019 annual meeting of stockholders (“2019 Proxy Statement”), which we will file with the SEC pursuant to Regulation 14A.


ITEM 11.
EXECUTIVE COMPENSATION

We incorporate the information this item requires by referring to the information under the caption Executive Compensation in our 2019 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.


ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

We incorporate the information this item requires by referring to the information under the caption Security Ownership of Certain Beneficial Owners and Management in our 2019 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.


Securities Authorized for Issuance Under Equity Compensation Plans

The following table presents certain information as of December 31, 2018 regarding our equity compensation plans (the 2010 Equity Incentive Plan, the 2014 Equity Incentive Plan, and the 2017 Equity Incentive Plan, all of which were approved by our security holders):
Plan category
 
Number of Common Stock Shares to be Issued upon Exercise of Outstanding Options
 
Weighted Average Exercise Price of Outstanding Options
 
Number of Securities Remaining Available for Future Issuance under Plans
Approved by security holders
 
10,874,849

 
$
4.36

 
8,299,807

Not approved by security holders
 

 
$

 


See more detailed information regarding our equity compensation plans in Note 14 in the Notes to Consolidated Financial Statements in this 2018 Form 10-K.


ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

We incorporate the information this item requires by referring to the information under the captions Proposal No. 1: Election of Directors and Corporate Governance in our 2019 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.


ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

We incorporate the information this item requires by referring to the information under the caption Proposal No. 2: Ratification of Appointment of Independent Registered Public Accounting Firm in our 2019 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.


43
 



PART IV

ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this 2018 Form 10-K:


Consolidated Financial Statements

In Part II, Item 8, we have included our consolidated financial statements, the notes thereto and the report of our Independent Registered Public Accounting Firm.


Financial Statement Schedules

We have omitted schedules required by applicable SEC accounting regulations because they are either not required under the related instructions, are inapplicable, or we present the required information in the financial statements or notes thereto.


Exhibits

We describe the exhibits filed as part of, or incorporated by reference into, this 2018 Form 10-K in the attached Exhibit Index.


EXHIBIT INDEX

 
 
 
 
Incorporated Herein
By Reference To
Exhibit Number
 
Description
 
Document
 
Filed On
 
Exhibit Number
2.1 1
 
 
8-K
 
05/07/2014
 
2.1
2.2 1
 
 
8-K
 
08/20/2015
 
2.1
2.3 1
 
 
8-K
 
09/26/2016
 
2.1
2.4 1
 
 
8-K
 
03/19/2019
 
2.1
3.1
 
 
8-K
 
12/30/2014
 
3.1
3.2
 
 
8-K
 
01/12/2016
 
3.1

44
 


 
 
 
 
Incorporated Herein
By Reference To
Exhibit Number
 
Description
 
Document
 
Filed On
 
Exhibit Number
3.3
 
 
8-K
 
06/08/2016
 
3.1
3.4
 

 
8-K
 
04/11/2017
 
3.1
3.5
 
 
8-K
 
06/04/2015
 
3.1
3.6
 
 
8-K
 
02/13/2015
 
3.1
4.1
 
 
10-K
 
03/23/2012
 
4.1
4.2
 
 
8-K
 
05/07/2014
 
4.1
4.3
 
 
8-K
 
09/28/2015
 
10.4
4.4
 
 
8-K
 
09/26/2016
 
4.1
4.5
 
 
8-K
 
09/26/2016
 
4.2
4.6
 
 
8-K
 
07/03/2018
 
4.1
10.1
 
 
8-K
 
04/04/2013
 
2.1
10.2 2
 
 
8-K
 
06/21/2010
 
10.34
10.3 2
 
 
8-K
 
01/12/2016
 
10.1
10.4 2
 
 
8-K
 
01/24/2018
 
10.1
10.5 2
 
 
8-K
 
07/13/2015
 
10.1
10.6
 
 
8-K
 
09/28/2015
 
10.1
10.7
 
 
8-K
 
09/28/2015
 
10.2
10.8
 
 
8-K
 
09/26/2016
 
10.1

45


 
 
 
 
Incorporated Herein
By Reference To
Exhibit Number
 
Description
 
Document
 
Filed On
 
Exhibit Number
10.9
 
 
8-K
 
10/25/2017
 
10.1
10.10
 
 
8-K
 
12/05/2017
 
10.1
10.11
 
 
8-K
 
05/02/2018
 
10.1
10.12
 
 
8-K
 
07/03/2018
 
10.1
10.13
 
 
8-K
 
09/28/2015
 
10.3
10.14
 
 
8-K
 
09/28/2015
 
10.5
10.15
 
 
8-K
 
09/26/2016
 
10.2
10.16
 
 
8-K
 
07/03/2018
 
10.2
21.1
 
 
 
 
 
 
 
23.1
 
 
 
 
 
 
 
31.1
 
 
 
 
 
 
 
31.2
 
 
 
 
 
 
 
32
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 

46


 
 
 
 
Incorporated Herein
By Reference To
Exhibit Number
 
Description
 
Document
 
Filed On
 
Exhibit Number
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 

1.
We have omitted certain schedules and exhibits to these agreements in accordance with item 601(b)(2) of Regulation S-K. We will furnish a copy of any omitted schedule and/or exhibit to the SEC upon request.

2.
Management Contract or Compensation Plan or Arrangement.


ITEM 16.
FORM 10-K SUMMARY

None.



47



SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
REMARK HOLDINGS, INC.
 
 
 
 
 
Date:
April 1, 2019
By:
 
/s/ Alison Davidson
 
 
 
 
Alison Davidson
 
 
 
 
Interim Chief Financial Officer
 
 
 
 
(principal financial officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Name
 
Title
 
Date
 
 
 
 
 
/s/ Kai-Shing Tao
 
 
 
 
Kai-Shing Tao
 
Chief Executive Officer and Chairman
(principal executive officer)
 
April 1, 2019
 
 
 
 
 
 
 
 
 
/s/ Alison Davidson
 
 
 
 
Alison Davidson
 
Interim Chief Financial Officer
(principal financial and accounting officer)
 
April 1, 2019
 
 
 
 
 
 
 
 
/s/ Theodore Botts
 
 
 
 
Theodore Botts
 
Director
 
April 1, 2019
 
 
 
 
 
 
 
 
 
 
/s/ Brett Ratner
 
 
 
 
Brett Ratner
 
Director
 
April 1, 2019
 
 
 
 
 
 
 
 
 
 
/s/ William Grounds
 
 
 
 
William Grounds
 
Director
 
April 1, 2019
 
 
 
 
 
 
 
 
 
 
/s/ Daniel Stein
 
 
 
 
Daniel Stein
 
Director
 
April 1, 2019


48


FINANCIAL STATEMENTS



F - 1


Report of Independent Registered Public Accounting Firm

The Board of Directors and
Stockholders of Remark Holdings, Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Remark Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated April 1, 2019, expressed an adverse opinion.

Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and negative cash flows from operating activities and has a negative working capital and a stockholders’ deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ Cherry Bekaert LLP

We have served as the Company’s auditor since 2011.


Atlanta, Georgia
April 1, 2019


F - 2
 


REMARK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except par values)


 
December 31,
 
2018
 
2017
Assets
 
 
 
Cash and cash equivalents
$
14,410

 
$
22,632

Restricted cash
11,138

 
11,670

Trade accounts receivable, net
6,369

 
3,673

Prepaid expense and other current assets
12,128

 
5,518

Notes receivable, current
100

 
290

Total current assets
44,145

 
43,783

Notes receivable

 
100

Property and equipment, net
10,570

 
13,387

Investments in unconsolidated affiliates
2,005

 
1,030

Intangibles, net
17,930

 
23,946

Goodwill
18,514

 
20,099

Other long-term assets
644

 
1,192

Total assets
$
93,808

 
$
103,537

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
30,876

 
$
17,857

Accrued expense and other current liabilities
24,664

 
18,795

Deferred merchant booking
4,664

 
9,027

Contract Liability
4,063

 
3,691

Note payable
3,000

 
3,000

Current maturities of long-term debt, net of unamortized discount and debt issuance cost
35,314

 
38,085

Total current liabilities
102,581

 
90,455

Warrant liability
1,383

 
89,169

Other liabilities
2,968

 
3,501

Total liabilities
106,932

 
183,125

 
 
 
 
Commitments and contingencies (Note 13)


 


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

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 39,053,312 and 28,406,026 shares issued and outstanding; each at December 31, 2018 and 2017, respectively
39

 
28

Additional paid-in-capital
308,018

 
220,117

Accumulated other comprehensive loss
32

 
115

Accumulated deficit
(321,213
)
 
(299,848
)
Total stockholders’ equity (deficit)
(13,124
)
 
(79,588
)
Total liabilities and stockholders’ equity
$
93,808

 
$
103,537

See Notes to Consolidated Financial Statements

F - 3

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

 
Year Ended December 31,
 
2018
 
2017
Revenue, net
$
79,110

 
$
70,601

Cost and expense
 
 
 
Cost of revenue (excluding depreciation and amortization)
24,628

 
16,909

Sales and marketing 1
38,391

 
33,252

Technology and development 1
13,332

 
11,642

General and administrative 1
33,344

 
19,391

Depreciation and amortization
10,875

 
11,070

Impairments
2,209

 
14,646

Other operating expense 1
1,084

 
1,070

Total cost and expense
123,863

 
107,980

Operating loss
(44,753
)
 
(37,379
)
Other income (expense)
 
 
 
Interest expense
(6,491
)
 
(4,645
)
Other income, net
282

 
23

Change in fair value of warrant liability
27,879

 
(64,139
)
Other gain (loss)
858

 
(317
)
Total other income (expense), net
22,528

 
(69,078
)
Loss before income taxes
(22,225
)
 
(106,457
)
Benefit from (provision for) income taxes
667

 
(278
)
Net loss
$
(21,558
)
 
$
(106,735
)
Other comprehensive income (loss)
 
 
 
Foreign currency translation adjustments
(83
)
 
131

Comprehensive loss
$
(21,641
)
 
$
(106,604
)
 
 
 
 
Weighted-average shares outstanding, basic and diluted
34,545

 
23,763

 
 
 
 
Net loss per share, basic and diluted
$
(0.62
)
 
$
(4.49
)
 
 
 
 
1 Includes share-based compensation as follows:
 
 
 
Sales and marketing
$
129

 
$

Technology and development
(280
)
 
716

General and administrative
13,098

 
3,504

Other operating expense
$
1

 
$


See Notes to Consolidated Financial Statements

F - 4

REMARK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands, except number of shares)

 
Common Stock
 
 
 
 
 
 
 
 
 
Number of Shares
 
Par Value
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total
Balance at December 31, 2016
22,232,004

 
$
22

 
$
190,507

 
$
(16
)
 
$
(193,113
)
 
$
(2,600
)
Net loss

 

 
 
 

 
(106,735
)
 
(106,735
)
Share-based compensation

 

 
3,618

 

 

 
3,618

Common stock sales
5,758,996

 
6

 
24,154

 

 

 
24,160

Equity instrument exercises
378,516

 

 
1,750

 

 

 
1,750

Debt instrument conversion
39,010

 

 
174

 

 

 
174

Restricted stock forfeiture
(2,500
)
 

 

 

 

 

Reclassification of liability-classified stock-based compensation

 

 
(114
)
 

 

 
(114
)
Other

 

 
28

 
131

 

 
159

Balance at December 31, 2017
28,406,026

 
$
28

 
$
220,117

 
$
115

 
$
(299,848
)
 
$
(79,588
)
Net loss

 

 

 

 
(21,558
)
 
(21,558
)
Effect of adopting of new revenue recognition policy

 

 

 

 
193

 
193

Share-based compensation

 

 
13,494

 

 

 
13,494

Common stock sales
5,893,428

 
6

 
13,562

 

 

 
13,568

Equity instrument exercises
4,753,858

 
5

 
60,887

 

 

 
60,892

Reclassification of liability-classified stock-based compensation

 

 
(12
)
 

 

 
(12
)
Other

 

 
(30
)
 
(83
)
 

 
(113
)
Balance at December 31, 2018
39,053,312

 
$
39

 
$
308,018

 
$
32

 
$
(321,213
)
 
$
(13,124
)
See Notes to Consolidated Financial Statements

F - 5

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

 
Year Ended December 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(21,558
)
 
$
(106,735
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Change in fair value of warrant liability
(27,879
)
 
64,139

Depreciation and amortization
10,875

 
11,070

Share-based compensation
12,948

 
4,220

Amortization of debt issuance costs and discount
1,005

 
261

Deferred taxes
527

 
8

Loss (gain) on disposal of long-lived assets
(922
)
 
82

Loss on impairment of intangible assets, including goodwill
2,209

 
14,618

Other
162

 
243

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(3,051
)
 
(2,283
)
Prepaid expense and other assets
(5,813
)
 
(1,781
)
Accounts payable, accrued expense and other liabilities
18,985

 
5,379

Deferred merchant booking
(4,363
)
 
2,036

Contract liability
669

 
228

Net cash used in operating activities
$
(16,206
)
 
$
(8,515
)
Cash flows from investing activities:
 
 
 
Proceeds from asset dispositions
1,140

 
123

Purchases of property, equipment and software
(1,478
)
 
(1,171
)
Payment of payroll costs capitalized to software in progress
(1,607
)
 
(2,427
)
Purchase of equity in unconsolidated affiliate
(480
)
 

Other

 
(29
)
Net cash used in investing activities
(2,425
)
 
(3,504
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock, net
14,553

 
25,910