REMARK HOLDINGS, INC. You should read our discussion and analysis of our financial condition and results of operations for the three and nine months endedSeptember 30, 2020 in conjunction with our unaudited condensed consolidated financial statements and notes thereto set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q. Such discussion and analysis includes forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. You should also read " Special Note Regarding Forward-Looking Statements " in the section following the table of contents of this report. OVERVIEW
We are a diversified global technology company with leading artificial intelligence ("AI") and data-analytics solutions, as well as a portfolio of digital media properties.
Our AI Business Through our proprietary data and AI platform, our Remark AI business (currently known in theAsia-Pacific region as KanKan) generates revenue by delivering AI-based vision products, computing devices and software-as-a-service solutions for businesses in many industries. In addition to the other work that we have ramped up, we continue partnering with top universities on research projects targeting algorithm, artificial neural network and computing architectures which we believe keeps us among the leaders in technology development. During 2019, our research team participated in a series of computer vision competitions at the Conference on Computer Vision and Pattern Recognition and theInternational Conference on Computer Vision (considered the top two computer vision conferences in the world) and was ranked first or second in many of such competitions.
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.
Retail Solutions. Utilizing a client's existing cameras and strategic sensors
placed throughout the store, Remark AI's retail solutions swiftly analyze
real-time customer shopping behavior, such as time of store entry and
shelf-browsing habits, and 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.
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
Table of Contents 23 Financial Statement Index
-------------------------------------------------------------------------------- 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. Our Biosafety Business The first half of 2020 was one of renewed focus for us as we repurposed and improved our existing urban life cycle solution that we were selling to make schools inChina "smart" schools to build a new product line of high-quality, highly-effective thermal imaging solutions that leverage our innovative software. We currently focus our efforts predominantly in the U.S. market. Remark AI Thermal Kits. 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. Remark AI Thermal Pads. 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. We have also developed the Remark AI Thermal Helmet which can, for example, be worn by security personnel at large gatherings allowing for a mobile thermal scanning ability. Other Businesses We also maintain a digital media portfolio which, in addition to operating businesses, includes an approximately 4.4% ownership in the issued stock ofSharecare, Inc. , an established health and wellness platform with more than 100 million users, which has now raised in excess of$425 million of total capital. We continue to evaluate opportunities to monetize and maximize the value of this asset for our shareholders. In addition to AI-based products revenue from our Remark AI business, activities such as online merchandise sales generated from Bikini.com, our e-commerce website selling swimwear and accessories in the latest styles, also contributed to our consolidated revenue in the current-year and prior-year periods, while advertising also contributed to revenue in prior-year periods. Overall Business Outlook Our innovative AI-based solutions continue to gain worldwide awareness and recognition through media exposure, comparative testing, product demonstrations and word of mouth resulting from positive responses and increased acceptance. We intend to 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 and other countries where we see a tremendous number of requests for AI products and solutions in the workplace and public safety markets, especially in response to the COVID-19 pandemic. However, the COVID-19 pandemic may also continue to present challenges to our business, 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. 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. Table of Contents 24 Financial Statement Index --------------------------------------------------------------------------------
Business Developments During 2020
After spending most of the first quarter of 2020 on product development and relationship building, we were able to launch our biosafety business in the second quarter of 2020 and begin recognizing revenue from sales of the new products. Our expectation is that theU.S. will be the primary market for this new product line, though we will continue to work to develop other markets as well. The third quarter of 2020 saw us ramp up execution of our larger contracts inChina , such as that with China Mobile and contracts with several school districts. We expect to continue completing projects under those contracts and under other contracts to continue to increase revenue from our China AI. Our work to build on the initial success of our biosafety business continues. Not all businesses across theU.S. have re-opened after COVID-19 lockdowns and not all of those that have re-opened have done so completely, which, in addition to the uncertainty of whether new closures will be implemented, somewhat slowed our biosafety business sales during the third quarter of 2020. Customers and potential customers, however, continue to show strong interest in our products, so we expect that revenue from the biosafety business will increase as more businesses can begin to make their plans to re-open. ThoughChinese New Year celebrations, working capital constraints and theU.S. -China trade war had some adverse impact, our business has also been significantly impacted by the COVID-19 pandemic, which has resulted in national and local governmental authorities across the world implementing numerous preventative measures in an effort to control the spread of the virus, including travel restrictions, shelter-in-place orders, school closings, closure of non-essential businesses and other quarantine measures. The pandemic and the related preventative measures have limited our operational capabilities by preventing our employees from working for long periods of time and causing many of our customers to delay implementation of contracts we already signed with them, all of which has adversely impacted our business and results of operations. Our business and financial results may be materially and adversely impacted by the COVID-19 pandemic for the duration of 2020 or longer, and we are unable to predict the duration or degree of such impact with any certainty. For example, health officials have predicted a surge in COVID-19 infections during the fall and winter of 2020, which could lead to additional preventative measures including a reintroduction of quarantines in places that have relaxed such quarantines after the initial outbreak.
The following table presents our revenue categories as a percentage of total
consolidated revenue during the nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
AI-based products and
services 94 % 80 % 91 % 72 %
Advertising and other 6 % 20 % 9 % 28 %
CRITICAL ACCOUNTING POLICIES
During the three and nine months ended September 30, 2020 , we made no material
changes to our critical accounting policies as we disclosed them in Part II,
Item 7 of our 2019 Form 10-K.
Table of Contents 25 Financial Statement Index
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The following tables summarize our operating results for the three and nine months endedSeptember 30, 2020 , and the discussion following the tables explains material changes in the operating results for the three and nine months endedSeptember 30, 2020 compared to the three and nine months endedSeptember 30, 2019 . (dollars in thousands) Three Months Ended September 30, Change 2020 2019 Dollars Percentage Revenue$ 2,646 $ 686 $ 1,960 286 % Cost of revenue 1,679 189 1,490 788 % Sales and marketing 417 736 (319) (43) % Technology and development 738 752 (14) (2) % General and administrative 2,380 3,052 (672) (22) % Depreciation and amortization 72 229 (157) (69) % Impairments 463 - 463 Interest expense (60) (457) 397 (87) % Other income (58) (24) (34) 142 % Gain on lease termination 2,044 - 2,044 Change in FV of warrant liability 5,570 (160) 5,730 (3,581) % Other gain (loss) 21 (28) 49 (175) % (dollars in thousands) Nine Months Ended September 30, Change 2020 2019 Dollars Percentage Revenue $ 5,376$ 4,760 $ 616 13 % Cost of revenue 2,910 3,323 (413) (12) % Sales and marketing 1,319 2,282 (963) (42) % Technology and development 2,863 2,910 (47) (2) % General and administrative 7,018 8,483 (1,465) (17) % Depreciation and amortization 228 814 (586) (72) % Impairments 463 - 463 Other operating expense - 6 (6) (100) % Interest expense (1,296) (1,397) 101 (7) % Other income (1) 23 (24) (104) % Gain on lease termination 3,582 - 3,582 Change in FV of warrant liability (633) 502 (1,135) (226) % Other gain (loss) (52) (27) (25) 93 % Table of Contents 26
-------------------------------------------------------------------------------- Revenue and Cost of Revenue. During the three months endedSeptember 30, 2020 , we ramped up execution of our larger contracts inChina , such as that with China Mobile and the contracts with several school districts, such that we were able to complete more projects than we did in the comparable period of 2019 and earn$1.3 million more revenue. Also, we collected$0.2 million more from customers related to projects we completed in prior years but for which we could not immediately recognize revenue due to uncertainty regarding collections. Lastly, our new biosafety business contributed$0.4 million to the overall increase in revenue during the three months endedSeptember 30, 2020 as we launched our thermal imaging product line primarily in theU.S beginning in 2020. Cost of revenue during the three months endedSeptember 30, 2020 primarily increased in conjunction with the ramping up of work on our larger contracts inChina , while the new biosafety business added another$0.3 million to cost of revenue. During the nine months endedSeptember 30, 2020 , the$1.5 million increase in revenue from our biosafety business was partially offset as revenue from ourRemark Entertainment business decreased$0.5 million due to contracts that ended in the prior year that we did not renew, while e-commerce revenue decreased about$0.3 million due to the combined effects of our decision to sell portions of our inventory at lower costs as well as reduced orders as the COVID-19 pandemic set in and changed consumer behavior. Though revenue related to our China AI projects remained relatively unchanged during the nine months endedSeptember 30, 2020 from the comparable period of 2019, the cost of revenue decreased by$0.8 million . One project that we completed during the first quarter of 2019 was a larger project for which we recognized approximately$0.9 million in cost of revenue despite not being able to recognize the associated revenue due to uncertainty of collection of contract amounts due to us. Cost of revenue also decreased by$0.6 million during the nine months endedSeptember 30, 2020 because we had recognized a full reserve against our e-commerce inventory in the prior year. The decreases in cost of revenue were offset by the increase in cost of revenue associated with our biosafety business which began in 2020. Sales and marketing. The decrease in sales and marketing expense for the three and nine months endedSeptember 30, 2020 primarily resulted from a decrease in headcount. General and administrative. During the three and nine months endedSeptember 30, 2020 , bad debt expense decreased by$0.7 million because collection patterns have not indicated a need to record a significant allowance in the current year periods. We also entered into a less-costly lease on our current office space inLas Vegas , which caused decreases of$0.3 million and$0.6 million , respectively, in rent expense. Also, a decrease in headcount contributed to the overall decrease in general and administrative expense in both periods of 2020. Depreciation and amortization. The decrease in depreciation and amortization was the result of long-lived assets which were being depreciated or amortized in the prior-year periods which were no longer being depreciated in the current year periods because such assets became fully depreciated or amortized before, or during the early part of, the current year periods. Impairments. During third quarter of 2020, we impaired our investment in AIO, resulting in an impairment charge of$0.4 million . No impairments were recorded during 2019.
Interest expense. Our prepayment of a large portion of our debt when we
completed the sale of
Gain on lease termination. DuringAugust 2020 , we entered into a settlement agreement relating to the lease for our former office space inLas Vegas which we vacated duringMarch 2020 . DuringMarch 2020 , we reduced right of use assets and operating lease liabilities relating to this lease, which resulted in a gain on lease termination of$1.5 million . In addition, we recognized a further gain of$2.0 million duringAugust 2020 , when we entered into the Hughes Center Lease Settlement. The comparable period of the prior year reflected no comparable activity. 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. The decrease in our common stock price betweenJune 30, 2020 andSeptember 30, 2020 caused the decrease in the fair value of our warrant liability during such period, while the increase in our common stock price between Table of Contents 27 --------------------------------------------------------------------------------December 31, 2019 andSeptember 30, 2020 resulted in a corresponding increase in the fair value of our warrant liability during nine months endedSeptember 30, 2020 . The increase in our common stock price betweenJune 30, 2019 andSeptember 30, 2019 caused the decrease in the fair value of our warrant liability during such period, but our common stock price decreased to a lesser extent betweenDecember 31, 2018 andSeptember 30, 2019 . The increase in the fair value of our warrant liability during the nine months endedSeptember 30, 2020 was due to an increase in our estimate of the expected volatility of our stock price that we use as an input to the model used to estimate the fair value of the warrants, the effect of which was only slightly offset by the decrease in our common stock price during the nine months endedSeptember 30, 2020 .
LIQUIDITY AND CAPITAL RESOURCES
Overview
During the nine months endedSeptember 30, 2020 , and in each fiscal year since our inception, we have incurred net losses which have resulted in an accumulated deficit of$354.7 million as ofSeptember 30, 2020 . Additionally, our operations have historically used more cash than they have provided. Net cash used in continuing operating activities was$14.5 million during the nine months endedSeptember 30, 2020 . As ofSeptember 30, 2020 , our cash and cash equivalents balance was$2.1 million , and we had a negative working capital balance of$5.8 million . We were a party to the Financing Agreement with the Lenders pursuant to which the Lenders extended credit to us consisting of a term loan in the aggregate principal amount of$35.5 million . OnMay 15, 2019 , we completed the sale of all of the issued and outstanding membership interests ofVegas.com and used the cash proceeds of$30.0 million to pay amounts due under the Financing Agreement, of which approximately$10.0 million remained outstanding after giving effect to the application of such cash proceeds.
On
OnApril 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 ofJune 30, 2017 . The note is accruing interest at$500 per day on the unpaid principal until we repay the note in full. As ofSeptember 30, 2020 , we owed$1.5 million in principal and$0.4 million in accrued interest on such note. Pursuant to the terms of the purchase agreement we entered into in connection with our acquisition ofVegas.com in 2015, we were obligated to make an Earnout Payment of$1.0 million based upon the performance ofVegas.com in the year endedDecember 31, 2018 . We made the payment duringAugust 2020 .
On
Included in Other long-term assets as ofSeptember 30, 2020 is a loan of$1.5 million we made to an unrelated entity (our "China Business Partner") pursuant to a loan agreement we entered into with the China Business Partner. We are in the process of negotiating a separate contract with the China Business Partner setting out the terms pursuant to which the China Business Partner will assist us in obtaining contracts from some of the largest companies inChina . Under the loan agreement with the China Business Partner, upon receipt of a borrowing request from the China Business Partner, we have an obligation to advance up to an aggregate amount of$5.1 million over the loan term of five years. The initial$1.5 million that we have advanced allowed our China Business Partner to purchase and modify hardware to integrate with our AI software and meet the needs of potential customers such that the resulting integrated solutions could be demonstrated to the potential customers while bidding on large contracts. Any loans we make under the loan agreement will bear a simple interest rate of 10% per annum payable before eachDecember 31st during the loan term and will be convertible at our election into equity of the China Business Partner upon the China Business Partner's next equity financing. Table of Contents 28 -------------------------------------------------------------------------------- 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 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 potential sales of investment assets or operating businesses. Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (in particular, in response to the COVID-19 pandemic), 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. 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, cash equivalents and cash resources, and based on the probable success of one or more of the following plans:
•develop and grow new product line(s)
•monetize existing assets
•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 toNovember 23, 2021 .
Cash Flows - Continuing Operating Activities
During the nine months endedSeptember 30, 2020 , we used$3.8 million more cash in continuing operating activities than we did during the same period of the prior year. The increase in cash used in continuing operating activities is a result of the timing of payments related to elements of working capital.
Cash Flows - Continuing Investing Activities
We engaged in an immaterial amount of investing activities during the nine months endedSeptember 30, 2020 , and the change in investing activities from the comparable period of the prior year was not material, exclusive of the proceeds from the sale ofVegas.com in the prior year period.
Cash Flows - Financing Activities
During the nine months endedSeptember 30, 2020 , we received$32.0 million from sales of shares of our common stock reflecting more activity under our agreements withAspire Capital , whereas the same period of 2019 included stock sale proceeds of only$9.3 million . We also received debt proceeds of$0.4 million and repaid$13.3 million of debt during the nine months endedSeptember 30, 2020 , while the same period of the prior year included debt repayment of$25.5 million plus loan fee and debt issuance cost payments of$2.3 million . Finally, in the third quarter of 2020, we paid the final Earnout Payment related to our acquisition ofVegas.com in 2015;$0.9 million of the payment was reflected as a financing activity. Table of Contents 29
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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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