You should read our discussion and analysis of our financial condition and results of operations for the three months endedMarch 31, 2021 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. 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.
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 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. Table of Contents 20 Financial Statement Index
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Our Biosafety Business
We built 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. Other Businesses We also maintain a digital media portfolio which, in addition to operating businesses, includes an approximately 4.2% 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 and data analytics solutions continue to gain worldwide awareness and recognition through media exposure, comparative testing, product demonstrations and word of mouth resulting from positive responses and increased acceptance. We intend to 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, especially in response to the COVID-19 pandemic. However, the COVID-19 pandemic may also 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.
Business Developments During 2021
During the first quarter of 2021, we continued working to expand our biosafety business within theU.S. , with proof-of concept projects underway, and though our ability to more quickly expand has been slowed by the pace at which businesses are re-opening as pandemic restrictions ease and, in some cases, by regulatory approvals necessary before our potential customers can award contracts, our customers and potential customers continue to show strong interest in our products. Our expectation, therefore, that revenue from the biosafety business will continue to increase as business re-openings and decision-making processes speed up remains unchanged. InChina , project completions continued on a steady pace, except as affected by the seasonal closures related toChinese New Year . Table of Contents 21 Financial Statement Index -------------------------------------------------------------------------------- The COVID-19 pandemic continues to have some impact on our business; it has 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 around the world, including travel restrictions, shelter-in-place orders, school closings, closures of non-essential businesses and other quarantine measures. As a result, our business and financial results may be adversely impacted by the COVID-19 pandemic for the duration of 2021 and possibly longer, and we are unable to predict the duration or degree of such impact with any certainty. For example, there is surge in COVID-19 infections inIndia , and other countries are still struggling to contain the spread of the virus, all of 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 three months ended
Three Months Ended March
31,
2021 2020 AI-based products and services 92 % 75 % Advertising and other 8 % 25 %
CRITICAL ACCOUNTING POLICIES
During the three months endedMarch 31, 2021 , we made no material changes to our critical accounting policies as we disclosed them in Part II, Item 7 of our 2020 Form 10-K. Table of Contents 22 Financial Statement Index
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RESULTS OF OPERATIONS
The following table summarizes our operating results for the three months endedMarch 31, 2021 , and the discussion following the table explains material changes in the operating results for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . (dollars in thousands) Three Months Ended March 31, Change 2021 2020 Dollars Percentage Revenue $ 4,406$ 431 $ 3,975 922 % Cost of revenue 2,752 21 2,731 13,005 % Sales and marketing 1,001 416 585 141 % Technology and development 1,550 648 902 139 % General and administrative 2,697 2,740 (43) (2) % Depreciation and amortization 66 90 (24) (27) % Interest expense (235) (461) 226 (49) % Other income 1 - 1 Gain on lease termination - 1,538 (1,538) (100) % Change in FV of warrant liability (1,610) 57 (1,667) (2,925) % Other gain (loss) 43 (73) 116 (159) % Revenue and Cost of Revenue. During the three months endedMarch 31, 2021 , we completed more AI-related projects inChina than we did in the comparable period of 2020, a period which was affected by the combined effects of the COVID-19 pandemic, the ongoingU.S. -China trade war and working capital constraints. Additionally, during the three months endedMarch 31, 2021 , our biosafety business contributed$0.3 million more revenue than in the comparable period of 2020, and we completed an advertising project that added$0.3 million of revenue, while there was no such activity in the comparable period of 2020. Cost of revenue during the three months endedMarch 31, 2021 primarily increased in conjunction with the ramping up of work on our larger contracts inChina , with the advertising project contributing to a small portion of the increase in cost of revenue. Sales and marketing. The increase resulted from an additional payment we made to our China Business Partner to present a combination of their hardware and our KanKan AI software to large potential clients in response to requests for proposals that could result in lucrative contracts on AI projects to modernize such potential clients' facilities and operations. Technology and development. Our increased activities to continuously improve the biosafety product line developed towards the end of the first quarter of 2020 and to develop new products led to a$0.7 million increase in expense. Additionally, the increase in our common stock price atMarch 31, 2021 as compared to the price of our common stock onDecember 31, 2020 caused a$0.2 million increase 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. Interest expense. Our prepayment of a large portion of our debt in 2020 when we completed the sale ofVegas.com resulted in less debt principal outstanding and, therefore, the decrease in interest expense for the three months endedMarch 31, 2021 . Table of Contents 23
-------------------------------------------------------------------------------- Gain on lease termination. DuringMarch 2020 , we reduced right of use assets and operating lease liabilities relating to one of our leases which was terminated, which resulted in a gain on lease termination of$1.5 million . We did not have any lease terminations during the three months endedMarch 31, 2021 . Change in fair value of warrant liability. The change in the fair value of our warrant liability maintains direct relationships with the change in the price of our common stock as of the balance sheet date and the expected volatility in the price of our common stock. The increase in our common stock price betweenDecember 31, 2020 andMarch 31, 2021 contributed to the increase in the fair value of our warrant liability during such period, while the decrease in our common stock price betweenDecember 31, 2019 andMarch 31, 2020 was small in scale and it caused the decrease in the fair value of our warrant liability during such period. Our 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 also contributed to the increase in the fair value of our warrant liability during the three months endedMarch 31, 2021 .
LIQUIDITY AND CAPITAL RESOURCES
Overview
During the three months endedMarch 31, 2021 , and in each fiscal year since our inception, we have incurred net losses which have resulted in an accumulated deficit of$366.0 million as ofMarch 31, 2021 . Additionally, our operations have historically used more cash than they have provided. Net cash used in continuing operating activities was$5.5 million during the three months endedMarch 31, 2021 . As ofMarch 31, 2021 , our cash and cash equivalents balance was$0.9 million , and we had a negative working capital balance of$11.1 million and total stockholders' deficit of$13.7 million . 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 ofMarch 31, 2021 , we owed$1.5 million in principal and$0.5 million accrued interest on such note. OnFebruary 10, 2021 , we entered into a senior secured promissory note (the "Note") with certain of our subsidiaries as guarantors (the "Guarantors") andJefferson Remark Funding LLC (the "Lender"), pursuant to which the Lender extended credit to us consisting of a one-year term loan in the principal amount of$5.0 million . The Note bears interest at 15% per annum, which shall be payable on the last business day of each calendar quarter commencing onMarch 31, 2021 . The entire principal balance, as well as any unpaid accrued interest thereon, is due and payable in full onFebruary 10, 2022 . To secure the payment and performance of the obligations under the Note, we, together with the Guarantors, have granted to the Lender a first-priority lien on, and security interest in, all assets of Remark and the Guarantors, subject to certain customary exceptions. The Note contains representations, warranties, events of default, indemnifications and other provisions customary for financings of this type. The occurrence of any event of default under the Note may result in the principal amount outstanding and unpaid interest thereon becoming immediately due and payable. As ofMarch 31, 2021 , we owed$5.0 million in principal and$0.1 million accrued interest on such note.
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 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. Table of Contents 24 -------------------------------------------------------------------------------- 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 toMay 17, 2022 .
Cash Flows - Continuing Operating Activities
During the three months endedMarch 31, 2021 , we used$2.7 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 three
months ended
Cash Flows - Financing Activities
During the three months endedMarch 31, 2021 , we did not receive any cash proceeds from issuances of shares of our common stock, whereas the same period of 2020 included stock sale proceeds of$4.6 million . We also received debt proceeds of$4.8 million during the three months endedMarch 31, 2021 , while we did not issue debt instruments in the same period of the prior year.
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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