REMARK HOLDINGS, INC. You should read our discussion and analysis of our financial condition and results of operations for the three and six months endedJune 30, 2022 in conjunction with our condensed consolidated financial statements and notes thereto set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q. Such discussion and analysis includes forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. You should also read Business, Risk Factors and Special Note Regarding Forward-Looking Statements in this Form 10-Q.
OVERVIEW
We and the VIEs that we consolidate constitute a diversified global technology business with leading AI and data-analytics, as well as a portfolio of digital media properties. OUR BUSINESS Corporate Structure We are a holding company incorporated inDelaware and not a Chinese operating company. As a holding company, we conduct a significant part of our operations through our subsidiaries and through contractual arrangements with the VIEs based inChina . We use the VIE structure to address challenges resulting from laws, policies and practices that may disfavor foreign-owned entities that operate within industries deemed sensitive by the Chinese government. We own 100% of the equity of a WFOE, which has entered into contractual arrangements with the VIEs, which are owned by members of our management team inChina and/or by third parties. We fund the registered capital and operating expenses of the VIEs on behalf of the shareholders of the VIEs by making advances to, or on behalf of, the VIEs. We believe that we are the primary beneficiary of the VIEs because the contractual arrangements governing the relationship between the VIEs and our WFOE, which include an exclusive call option agreement, exclusive business cooperation agreement, a proxy agreement and an equity pledge agreement, enable us to (i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive call option to purchase, at any time, all or part of the equity interests in and/or assets of the VIEs to the extent permitted by Chinese laws. Because these contractual arrangements with the VIEs provide us with the power to direct the activities of the VIEs, for accounting purposes we are the primary beneficiary of the VIEs and we have consolidated the financial results of the VIEs in our consolidated financial statements in accordance withU.S. GAAP. The agreements governing the VIE contractual arrangements have not been tested in a court of law. However, an article published inChina Business Law Journal indicated that aChina International Economic and Trade Arbitration Commission Shanghai tribunal ruled in 2010 and 2011 in two related cases involving the contractual arrangement of an online game operating company that the contractual arrangement was void on the grounds that such arrangement violated the mandatory administrative regulations prohibiting foreign investors from investing in the online game operation business and constituted "concealing illegal intentions with a lawful form." According to publicly available information, while the agreements entered into by the parties in the aforementioned CIETAC cases are typical VIE agreements, the PRC domestic company involved in such cases was mainly engaged in online game operation. Although the PRC foreign investment regime restricts or prohibits foreign investment in certain industries, online game operation is one of few industries where there are rules specifically prohibiting foreign investors from controlling and participating in the business indirectly through contractual or technical support arrangements. Though the agreements in the CIETAC cases are similar to our contractual arrangements with the VIEs, we and the VIEs do not operate in the online game operation industry and, to our knowledge, the business conducted by the VIEs is not prohibited from investment from foreign investors inChina . We also note that the rulings in the CIETAC cases are not binding on Chinese courts or other arbitration tribunals. The following diagram illustrates our corporate structure, including our significant subsidiaries, and the relationship between our WFOE and the VIEs as of the date of this Form 10-Q. 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 ofChengdu Remark Technology Co., Ltd. ,Hangzhou Shufeng Technology Co., Ltd. ,Remark Data Technology Co., Ltd. andBonet (Beijing) Technology LLC , which constitute the VIEs, on the one hand, and KanKan Technology Table of Contents 27 Financial Statement Index --------------------------------------------------------------------------------
(
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Because we do not directly hold equity interests in the VIEs, we are subject to
risks and uncertainties of the interpretations and applications of Chinese laws
and regulations, including but not limited to, the validity and enforcement of
the contractual arrangements among the WFOE, the VIEs and the shareholders of
the VIEs. We are also subject to the risks and uncertainties about any future
actions of the Chinese government in this regard that could disallow the VIE
structure, which would likely
Table of Contents 28 Financial Statement Index
--------------------------------------------------------------------------------result in a material change in our operations and may cause the value of our common stock to depreciate significantly or become worthless.
The contractual arrangements may not be as effective as direct ownership in providing operational control and we face contractual exposure in such arrangements. For instance, the VIEs and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. The shareholders of the VIEs may not act in the best interests of our Company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business through the contractual arrangements with the VIEs. In the event that the 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 such arrangements. In addition, even if legal actions are taken to enforce such arrangements, there is uncertainty as to whether Chinese courts would recognize or enforce judgments ofU.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws ofthe United States or any state.
Risks of Doing Business in
We are subject to certain legal and operational risks associated with having a significant portion of our operations inChina . Chinese laws and regulations governing our current business operations, including the enforcement of such laws and regulations, are sometimes vague and uncertain and can change quickly with little advance notice. The Chinese government may intervene or influence our operations and the operations of the VIEs at any time and may exert more control over offerings conducted overseas and/or foreign investment inChina -based issuers, which could result in a material change in our operations and/or the value of our securities. In addition, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment inChina -based issuers could significant limit or completely hinder our ability to offer or continue to offer our securities to investors and cause the value of such securities to significantly decline or become worthless. Recently, the Chinese government adopted a series of regulatory actions and issued statements to regulate business operations inChina , including those related to the use of variable interest entities, data security and anti-monopoly concerns. As of the date of this Form 10-Q, neither we nor the VIEs have been involved in any investigations on cybersecurity review initiated by any Chinese regulatory authority, nor has any of them received any inquiry, notice or sanction. As of the date of this Form 10-Q, no relevant laws or regulations inChina explicitly require us to seek approval from the CSRC for any securities listing. As of the date of this Form 10-Q, neither we nor the VIEs have received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other Chinese governmental authorities relating to securities listings. However, since these statements and regulatory actions are newly published, official guidance and related implementation rules have not been issued. It is highly uncertain what potential impact such modified or new laws and regulations will have on our ability to conduct our business, accept investments or list or maintain a listing on aU.S. or foreign exchange. As of the date of this 10-Q, we and the VIEs are not required to seek permissions from the CSRC, the CAC, or any other entity that is required to approve of the operations of the VIEs. Nevertheless, Chinese regulatory authorities may in the future promulgate laws, regulations or implement rules that require us, our subsidiaries or the VIEs to obtain permissions from such regulatory authorities to approve the operations of the VIEs or any securities listing.
Holding Foreign Companies Accountable Act
The HFCA Act was enacted onDecember 18, 2020 . The HFCA Act states if theSEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, theSEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market inthe United States . OnJune 22, 2021 , theU.S. Senate passed a bill which, if passed by theU.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two. OnDecember 2, 2021 , theSEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that theSEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction. OnDecember 16, 2021 , the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered inChina and inHong Kong because of positions taken by Chinese andHong Kong authorities in those jurisdictions. The PCAOB has made Table of Contents 29 Financial Statement Index --------------------------------------------------------------------------------
such determination as mandated under the HFCA Act. Pursuant to each annual
determination by the PCAOB, the
Our auditor,Weinberg & Company , an independent registered public accounting firm headquartered inthe United States , is not subject to the determinations announced by the PCAOB onDecember 16, 2021 . Our auditor is currently subject to PCAOB inspections and has been inspected by the PCAOB on a regular basis. However, if the PCAOB is unable to inspect the work papers of our accounting firm in the future, such lack of inspection could cause trading in our common stock to be prohibited under the HFCA Act, and as a result, an exchange may determine to delist our common stock. The delisting and the cessation of trading of our common stock, or the threat of our common stock being delisted and prohibited from being traded, may materially and adversely affect the value of your investment. See "Risk Factors-Risks Relating to Doing Business inChina -Trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or fully investigate our auditors, and as a result, Nasdaq may determine to delist our securities." Transfer of Cash or Assets Dividend Distributions
As of the date of this Form 10-Q, none of our subsidiaries or any of the consolidated VIEs have made any dividends or distributions to us.
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. UnderDelaware law, aDelaware corporation's ability to pay cash dividends on its capital stock requires the corporation to have either net profits or positive net assets (total assets less total liabilities) over its capital. If we determine to pay dividends on any of our common stock in the future, as a holding company, we may rely on dividends and other distributions on equity from our WFOE for cash requirements, including the funds necessary to pay dividends and other cash contributions to our stockholders. Our WFOE's ability to distribute dividends is based upon its distributable earnings. Current Chinese regulations permit our WFOE to pay dividends to their shareholders only out of its registered capital amount, if any, as determined in accordance with Chinese accounting standards and regulations, and then only after meeting the statutory reserve equal to 50% of registered capital. If our WFOE incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Any limitation on the ability of our WFOE to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business. In addition, any cash dividends or distributions of assets by our WFOE to its stockholder are subject to a Chinese withholding tax of as much as 10%. The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out ofChina . Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. If we are unable to receive all of the revenues from our operations through the current VIE contractual arrangements, we may be unable to pay dividends on our common stock. For us to pay dividends to our stockholders, we will rely on payments made from the VIEs to our WFOE in accordance with the VIE contractual arrangements, and the distribution of payments from the WFOE to theDelaware holding company as dividends. Certain payments from the VIEs to the WFOE pursuant to the VIE contractual arrangements are subject to Chinese taxes, including a 6% VAT and 25% enterprise income tax. Table of Contents 30 Financial Statement Index --------------------------------------------------------------------------------
Our Company's Ability to Settle Amounts Owed under the VIE Contractual Arrangements
Under the VIE contractual arrangements, the VIEs are obligated to make payments to our WFOE, in cash or in kind, at the WFOE's request. We will be able to settle amounts owed under the VIE contractual arrangements through dividends paid by our WFOE to our Company. Such ability may be restricted or limited as follows:
First, any payments from the VIEs to our WFOE are subject to Chinese taxes, including a 6% VAT and 25% enterprise income tax.
Second, current Chinese regulations permit our WFOE to pay dividends to their shareholders only out of its registered capital amount, if any, as determined in accordance with Chinese accounting standards and regulations, and then only after meeting the statutory reserve equal to 50% of registered capital. In addition, if our WFOE incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to theDelaware holding company. Third, the Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out ofChina . Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from profits, if any.
AI Business
Through the proprietary data and AI software platform we co-developed with one of the VIEs, our Remark AI business in theU.S. and the KanKan AI business operated by the VIEs in theAsia-Pacific region generate revenue by delivering AI-based computer vision products, computing devices and software-as-a-service solutions for businesses in many industries. In addition to the other work that we and the VIEs have ramped up, we and the VIEs 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. Our research team continues to participate in various computer vision competitions at which it wins or ranks near or at the top. We continue to market Remark AI's innovative AI-based solutions to customers in the retail, urban life cycle and workplace and food safety markets. We have also begun to expand our AI-based safety solutions to railway customers in the transportation market. Retail Solutions. Utilizing a client's existing cameras and IoT devices placed throughout the store, Remark AI's retail solutions swiftly analyze real-time customer shopping behavior, such as time of store entry and shelf-browsing habits, and provide managers with a customer heatmap that reflects traffic patterns. Purchase history is also analyzed, leading to relevant offers for future purchase conversions, and customers for their continued loyalty through a special VIP status that brings customized promotions and coupons along with attentive customer service. Remark AI's retail solutions allow retailers and store managers to make better data-driven decisions regarding store layout, item placement, and pricing strategy, all while anonymizing customers' identities to protect their privacy. Urban Life Cycle Solutions. We offer and have installed several solutions in what we call the urban life cycle category. Our urban life cycle solutions include our AI community system which assists in building "smart" communities by enhancing community security and safety. We also have AI solutions that help to make schools "smart" by (i) providing an accurate and convenient method for student check-in and check-out, (ii) providing an autonomous method of campus monitoring that enhances students' safety by, for example, monitoring students for elevated body temperatures that could indicate viral infections such as influenza or COVID-19, detecting trespassers, detecting dangerous behaviors or physical accidents that could result in injury, and (iii) monitoring the school kitchen for safety violations. In traffic management, our solutions assist in monitoring traffic for various violations by automatically detecting, capturing, and obtaining evidence regarding violations such as speeding, running red lights, driving against the flow of traffic and even using counterfeit registration plates. Additionally, our solutions provide constant road-condition monitoring, providing control centers with real-time information on traffic conditions such as areas of congestion or other traffic anomalies. Table of Contents 31 Financial Statement Index -------------------------------------------------------------------------------- Workplace and Food Safety Solutions. The monitoring and detection capabilities of our solutions ensure that workers are practicing established food safety protocols, wearing the proper personal protective equipment, and complying with local health codes. From commercial kitchens to factories to construction work zones, our safety-compliance algorithms manage regulatory functions, review hygienic and equipment status while checking and alerting management regarding violations. Railway Safety Solutions. In railway settings, our product known as the Smart Sentry uses the Smart Safety Platform (the "SSP"), a specialized version of the software platform we developed with one of the VIEs, to provide intrusion-detection capabilities that allow customers to monitor railroad tracks, rail yards and other sensitive areas around the clock, in all weather conditions and at varying distances. The Smart Sentry, which customers can deploy as an individual unit or as a system of units, detects when pedestrians or vehicles are crossing a railway or entering the railway tracks as a train is approaching, and then alerts customer personnel to the situation so action can be taken to prevent hazardous incidents from happening. When deployed in multiple-unit systems, each Smart Sentry unit works in concert with the other units to relay warnings that give train operators sufficient time to respond to the track intrusions from miles away. Using the Smart Sentry's high-end cameras and other hardware, the SSP also gathers and analyzes data on railway traffic and weather conditions along various railways to provide valuable, actionable information to railway personnel. In the near future, we expect to add more safety features to Smart Sentry, such as the ability to detect worn or otherwise damaged track and the ability to identify stationary obstacles like fallen rocks or trees. Biosafety Solutions. With help from one of the VIEs, we repurposed and improved our existing urban life cycle solution that we were selling to make schools inChina "smart" schools to build a product line of high-quality, highly-effective thermal imaging solutions that leverage our innovative software. We sell our Remark AI Thermal Kits to customers needing the ability to scan crowds and areas of high foot traffic for indications that certain persons with elevated temperatures may require secondary screening. Though the kits are semi-customizable, they generally consist primarily of a thermal imaging camera, a calibrating device, a computer to monitor the video feed, supporting equipment and our AI software. Once set up and calibrated, the kits scan a large number of people each minute, providing both thermally enhanced and standard video feeds that allow our customers to evaluate high volumes of people at large gatherings.
Our Remark AI rPad thermal imaging devices, usually mounted on a wall or a single-post stand, are designed for customers needing the ability to scan individuals on a one-by-one basis in situations where rapid, high-volume scanning is not necessary, such as at a customer's office entrances where employees can be scanned as they enter for indications of an elevated temperature that may require secondary screening. In addition to thermal scanning, we can customize our AI software embedded in the rPad to perform additional safety and security functions including identifying persons for authorized entry.
Other Businesses
Though our focus remains on our AI and data analytics solutions, which produce
substantially all of our revenue, we will continue to operate the Bikini.com
e-commerce business until such time as we can sell such business in the near
future. We also have continued developing a metaverse that we believe can lead
to opportunities in other verticals to which we can apply our AI expertise and
develop new revenue streams for our investors.
Table of Contents 32 Financial Statement Index
--------------------------------------------------------------------------------Overall Business Outlook
The innovative AI and data analytics solutions we and the VIEs already sell will continue to serve as the backbone of our efforts to expand our business not only in theAsia-Pacific region , where we believe there still are fast-growth AI market opportunities for our solutions, but also inthe United States andEurope , where we see a tremendous number of requests for AI products and solutions in the workplace and public safety markets. We continue to pursue large business opportunities, but anticipating when, or if, we can close these opportunities is difficult. Quickly deploying our software solutions in the market segments we have identified, in which we may face a number of large, well-known competitors, is also difficult. The response to the COVID-19 pandemic will likely continue to adversely affect our business and financial results, as could economic and geopolitical conditions in some international regions, and we do not yet know what will be the ultimate effects on our business. The COVID-19 pandemic caused a broad shift towards remote working arrangements for many businesses worldwide and injected uncertainty and delay into decision-making processes for such businesses. Varying degrees of preventative measures are still in place inChina and other parts of the world, including city-wide lockdowns, travel restrictions, closures of non-essential businesses and other quarantine measures. In particular, the preventative measures inChina as a result of the Chinese government's "Zero-COVID" policy have significantly limited the operational capabilities of the VIEs. Many cities across large swaths ofChina have recently been fully or partially locked down for weeks or even months, including economically significant regions such asShanghai . Such lockdowns have had a material adverse impact on our business and we expect them to continue to have a material adverse impact on our business at least through the third quarter of 2022. The full extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including resurgences and further spread of existing or new COVID-19 variants, the duration of any remaining preventative measures implemented by domestic and foreign governments, the impact on capital and financial markets and the related impact on the financial circumstances of our customers, all of which are highly uncertain and cannot be predicted. The pandemic-related situation continues to change rapidly, and additional impacts of which we are not currently aware may arise. We are closely monitoring worldwide developments and are continually assessing the potential impact on our business.
Inflation and Supply Chain
Other than the impact of inflation on the general economy, we do not believe that inflation has had a material effect on our operations to date. However, there is a risk that our operating costs could be subject to inflationary pressures in the future, which would have the effect of increasing our operating costs and put additional stress on our working capital resources. We have not experienced any supply chain disruptions that have had a material effect on our operations to date. As our business begins to expand in theU.S. based initially on our SSP software, we could be subjected to the risk of supply chain disruptions with regard to high-technology products such as servers and related equipment that we use to train our AI software algorithms and which we plan to sell to customers to support operation of the SSP.
Business Developments During 2022
The COVID-19 pandemic caused renewed lockdowns inChina , which made it difficult for us to interact with our clients and vendors. While we were able to complete several larger projects during the first half of 2022, primarily during the first quarter, including construction projects obtained through ourChina Business Partner and projects related to school campuses, the lockdowns that continued well into the second quarter prevented us from being able to complete as many projects as we otherwise had planned to complete during the second quarter. Table of Contents 33 Financial Statement Index
-------------------------------------------------------------------------------- The following table presents our revenue categories as a percentage of total consolidated revenue during the three and six months endedJune 30, 2022 and 2021. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 AI-based products and services 97 % 96 % 97 % 93 % Advertising and other 3 % 4 % 3 % 7 % CRITICAL ACCOUNTING POLICIES During the six months endedJune 30, 2022 , we made no material changes to our critical accounting policies as we disclosed them in Part II, Item 7 of our 2021 Form 10-K. RESULTS OF OPERATIONS The following tables summarize our operating results for the three and six months endedJune 30, 2022 , and the discussion following the table explains material changes in such operating results compared to the three and six months endedJune 30, 2021 . (dollars in thousands) Three Months Ended June 30, 2022 Change 2022 2021 Dollars Percentage Revenue, including amounts from China Business Partner $ 2,558$ 4,016 $ (1,458) (36) % Cost of revenue 1,847 2,252 (405) (18) % Sales and marketing 188 398 (210) (53) % Technology and development 508 1,305 (797) (61) % General and administrative 3,933 2,482 1,451 58 % Depreciation and amortization 37 49 (12) (24) % Interest expense (1,774) (380) (1,394) 367 % Change in fair value of warrant liability - 1,322 (1,322) (100) % Loss on investment (6,952) - (6,952) Other gain (loss), net 152 (24) 176 (733) % Provision for income taxes - (9) 9 (100) % Net loss (12,529) (1,561) (10,968) 703 % Table of Contents 34 Financial Statement Index -------------------------------------------------------------------------------- (dollars in thousands) Six Months Ended June 30, Change 2022 2021 Dollars Percentage Revenue, including amounts from China Business Partner$ 7,225 $ 8,422 $ (1,197) (14) % Cost of revenue 6,117 5,004 1,113 22 % Sales and marketing 336 1,399 (1,063) (76) % Technology and development 963 2,855 (1,892) (66) % General and administrative 7,872 5,179 2,693 52 % Depreciation and amortization 78 115 (37) (32) % Interest expense (3,960) (615) (3,345) 544 % Change in fair value of warrant liability - (288) 288 (100) % Loss on investment (26,008) - (26,008) Other gain (loss), net 151 20 131 655 % Provision for income taxes - (9) 9 (100) % Net loss (37,958) (7,022) (30,936) 441 % Revenue and Cost of Revenue. During the three and six months endedJune 30, 2022 , the VIEs completed larger AI-related projects than in the comparable periods of the prior year, including projects associated with the VIEs' collaboration with an unrelated entity (the "China Business Partner"), resulting in$1.0 million and$1.8 million more revenue, respectively. Decreases inU.S. revenue during the three and six months endedJune 30, 2022 of approximately$2.3 million from AI data intelligence services related to a daily fantasy sports project that was not repeated in the current year and, during the six months endedJune 30, 2022 , decreases of$0.3 million from advertising related to the daily fantasy sports project and approximately$0.4 million from our biosafety business due to a decline in demand, offset the increased revenue fromChina . During the three months endedJune 30, 2022 , cost of revenue decreased in relation to the decrease in revenue. The increase in cost of revenue during the six months endedJune 30, 2022 was related to the VIEs' completion of larger projects as described above, partially offset by the decrease in cost of revenue associated with theU.S. revenue decreases described above. Sales and marketing. The decrease in sales and marketing expense during the six months endedJune 30, 2022 resulted because the prior year to date included$1.3 million that one of our VIEs advanced to our China Business partner, and such amount was classified as marketing expense. The$1.3 million was partially offset by approximately$0.6 million resulting from our completion of orders from a client that resulted from our joint efforts with our China Business Partner. Because we had provided money to our China Business Partner in 2021 for the business development efforts that resulted in the customer orders, we had recorded the$0.6 million as an offset to the expense. Technology and development. Consulting fees decreased$0.7 million and$1.6 million during the three and six months endedJune 30, 2022 , respectively, because we no longer needed certain third-party services after our acquisition, in an immaterial business combination, of ourUnited Kingdom subsidiary. Additionally, the six months endedJune 30, 2022 reflected a small decrease in our common stock price while the same period during the prior year had almost no change in our common stock price, a situation that caused a$0.2 million decrease in share-based compensation expense related to our outstanding liability-classified China Cash Bonuses. Stock price is an input to the model we use to estimate the fair value of the China Cash Bonuses, and changes in stock price can cause large fluctuations in our estimates of fair value. General and administrative. The increase in general and administrative expense during the three and six months endedJune 30, 2022 was primarily the result of increases of$0.5 million and$0.9 million , respectively, in share-based compensation resulting almost entirely from the recognition of the stock option issuances made inJuly 2020 for which an accounting grant date did not occur untilJuly 2021 . Also contributing to the increases during the three and six months endedJune 30, 2022 were Table of Contents 35 -------------------------------------------------------------------------------- increases of$0.2 million and$0.5 million , respectively, in payroll and benefits, and increases of$0.5 million in each of the three-month and six-month periods of 2022 in certain business development expenses as we work to expand our client base. Further contributing to the increase during the three months endedJune 30, 2022 was a$0.1 million increase in accounting expense. Interest expense. We executed a$30.0 million note payable inDecember 2021 which bears interest at 16.5%; such note payable was the primary cause of the increase in interest expense during the three and six months endedJune 30, 2022 . The same period of the prior year included significantly less debt principal outstanding, with such principal bearing lower interest rates than on the note payable we executed inDecember 2021 . Included as part of interest expense during the six months endedJune 30, 2022 was$1.9 million of amortization of debt discount and debt issuance cost related to our note payable. Loss on investment in marketable securities. OnJuly 1, 2021 , as the result of a business combination involving Legacy Sharecare and New Sharecare, our equity in Legacy Sharecare converted into cash and shares of publicly traded common stock of New Sharecare. As a result of the common stock of New Sharecare being traded on a national securities exchange, we were able to remeasure our investment at fair value, resulting in the losses of$7.0 million and$26.0 million during the three and six months endedJune 30, 2022 , respectively. Change in fair value of warrant liability. After reclassifying our warrants to equity onAugust 31, 2021 , we are no longer required to routinely remeasure them at fair value. Other income (loss). Other income during the three and six months endedJune 30, 2022 increased over the other losses we incurred during the same periods of the prior year. During the three months endedJune 30, 2022 , we received a refundable tax credit of approximately$0.6 million from the government of theUnited Kingdom resulting from our research and development activities in its jurisdiction, which amount was partially offset by the additional$0.4 million of liquidated damages that we accrued during the second quarter of 2022 and that we expect to pay until theSEC declares the Armistice Resale Registration Statement effective or until our registration obligations in the Armistice Registration Rights Agreement terminate.
LIQUIDITY AND CAPITAL RESOURCES
Overview
During the six months endedJune 30, 2022 , and in each fiscal year since our inception, we have incurred net losses which have resulted in a stockholders' deficit of$6.3 million as ofJune 30, 2022 . Additionally, our operations have historically used more cash than they have provided. Net cash used in operating activities was$11.1 million during the six months endedJune 30, 2022 . As ofJune 30, 2022 , our cash balance was$1.1 million . OnDecember 3, 2021 , we entered into the Mudrick Loan Agreements pursuant to which we incurred the Mudrick Loans in the aggregate principal amount of$30.0 million . The Mudrick Loans bear interest at 16.5% per annum, which shall be payable on the last business day of each month commencing onDecember 31, 2021 . All amounts outstanding under the Mudrick Loans, including all accrued and unpaid interest, will be due and payable in full onJuly 31, 2022 . To secure the payment and performance of the obligations under the Mudrick Loan Agreements, we, together with the Guarantors, have granted toTMI Trust Company , as the collateral agent for the benefit of Mudrick, a first priority lien on, and security interest in, all assets of Remark and the Guarantors, subject to certain customary exceptions. The Mudrick Loan Agreements contain representations, warranties, events of default, indemnifications and other provisions customary for financings of this type. The occurrence of any event of default under the Mudrick Loan Agreements may result in the principal amount outstanding and unpaid interest thereon becoming immediately due and payable. In connection with our entry into the Mudrick Loan Agreements, we paid to Mudrick an upfront fee equal to 5.0% of the amount of the Mudrick Loans, which was netted against the drawdown of the Mudrick Loans and recorded as a discount of$1.5 million , and recorded debt issuance cost totaling$1.1 million . We are amortizing the discount on the Mudrick Loans and the debt issuance cost over the life of the Mudrick Loans. OnAugust 3, 2022 , we entered into a First Amendment to the Mudrick Loan Agreements (the "First Amendment"), which amends the Senior Secured Loan Agreements, dated as ofDecember 3, 2021 (collectively, as amended by the First Amendment, the "Mudrick Loan Agreements") by and among Remark, certain of our subsidiaries as guarantors and Mudrick. Pursuant to the First Amendment, Mudrick agreed, among other things, to (i) waive certain existing events of default under the Mudrick Loan Agreement, (ii) extend the originalJuly 31, 2022 maturity date toOctober 31, 2022 (provided, however, that if we prepay the principal amount of the loans in an amount of at least$5 million , the maturity date will be automatically extended toNovember 30, 2022 ), and (iii) defer payment of interest for the month ofJuly 2022 toAugust 31, 2022 . In addition, on and after the effective date of the First Amendment, the outstanding loans under the Mudrick Loan Agreement will bear Table of Contents 36 -------------------------------------------------------------------------------- interest at 18.5% per annum, payable on the last business day of each month commencing onAugust 31, 2022 . We have also agreed to commence marketing and sale efforts with respect to our Bikini.com business. In consideration for Mudrick's agreement to enter into the First Amendment and extend the maturity date, we agreed to pay Mudrick an amendment and extension payment in the amount of 2.0% of the unpaid principal balance of the loans outstanding as of the date of the First Amendment, which was paid in kind and added to the principal balance of the loans as of the effective date of the First Amendment..
Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities 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 from our AI offerings, as well as through sales of our thermal-imaging products. We cannot, however, provide assurance that revenue, income and cash flows generated from our businesses will be sufficient to sustain our operations in the twelve months following the filing of this Form 10-Q. As a result, we are actively evaluating strategic alternatives including debt and equity financings and reactively pursuing the sale of our Bikini.com subsidiary. Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (in particular, as a result of the COVID-19 pandemic, global supply chain disruptions, inflation and other cost increases, and the geopolitical conflict inUkraine ), will play primary roles in determining whether we can successfully obtain additional capital. We cannot be certain that we will be successful at raising additional capital or in selling our Bikini.com subsidiary. A variety of factors, many of which are outside of our control, affect our cash flow; those factors include the effects of the COVID-19 pandemic, 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 with existing cash and based on the probable success of one or more of the following plans:
•develop and grow new product line(s)
•monetize Bikini.com
•obtain additional capital through equity issuances.
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 toAugust 15, 2023 .
Cash Flows - Operating Activities
During the six months endedJune 30, 2022 , we used$4.8 million more cash in operating activities than we did during the same period of the prior year. The increase in cash used in operating activities is primarily the result of the timing of payments related to elements of working capital.
Cash Flows - Investing Activities
Investing activities during the six months ended
Cash Flows - Financing Activities
During the six months endedJune 30, 2022 , we repaid$6.2 million of the Mudrick Loans and received$1.5 million of advances from senior management representing various operating expense payments made on our behalf, while the prior year period's financing activity included$4.8 million of net debt proceeds plus$0.8 million of proceeds from issuances of our common stock shares. Table of Contents 37 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
Please refer to Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this report for a discussion regarding recently issued accounting pronouncements which may affect us.
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