REMARK HOLDINGS, INC

MARK
Real-time Estimate Quote. Real-time Estimate  - 01/20 12:31:31 pm
2.395USD -3.43%

REMARK : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/23/2020 | 12:51pm


You should read our discussion and analysis of our financial condition and
results of operations for the three and nine months ended September 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 the Asia-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 the International
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 in China "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 of
Sharecare, 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 the Asia-Pacific region, where we
believe there still are fast-growth AI market opportunities for our solutions,
but also in the 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 the U.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
in China, 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 the U.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.

Though Chinese New Year celebrations, working capital constraints and the
U.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 September 30, 2020.



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 ended September 30, 2020, and the discussion following the tables
explains material changes in the operating results for the three and nine months
ended September 30, 2020 compared to the three and nine months ended September
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 ended September 30, 2020,
we ramped up execution of our larger contracts in China, 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 ended September 30, 2020 as we launched our
thermal imaging product line primarily in the U.S beginning in 2020.

Cost of revenue during the three months ended September 30, 2020 primarily
increased in conjunction with the ramping up of work on our larger contracts in
China, while the new biosafety business added another $0.3 million to cost of
revenue.

During the nine months ended September 30, 2020, the $1.5 million increase in
revenue from our biosafety business was partially offset as revenue from our
Remark 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 ended September 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 ended September 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 ended September 30, 2020 primarily resulted from a decrease in
headcount.

General and administrative. During the three and nine months ended September 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 in
Las 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 Vegas.com resulted in the decrease in interest expense for
the three and nine months ended September 30, 2020.




Gain on lease termination. During August 2020, we entered into a settlement
agreement relating to the lease for our former office space in Las Vegas which
we vacated during March 2020. During March 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 during August 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 between June 30, 2020 and September 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 and September 30, 2020 resulted in a corresponding increase in
the fair value of our warrant liability during nine months ended September 30,
2020
. The increase in our common stock price between June 30, 2019 and September
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 between
December 31, 2018 and September 30, 2019. The increase in the fair value of our
warrant liability during the nine months ended September 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 ended September 30, 2020.



LIQUIDITY AND CAPITAL RESOURCES



Overview




During the nine months ended September 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 of September 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 ended
September 30, 2020. As of September 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.

On May 15, 2019, we completed the sale of all of the issued and outstanding
membership interests of Vegas.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 May 28, 2020, we repaid in full all outstanding obligations under, and
terminated, the Financing Agreement in an amount equal to approximately $12.7
million
.




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. As of September 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 of Vegas.com in 2015, we were obligated to make an Earnout
Payment of $1.0 million based upon the performance of Vegas.com in the year
ended December 31, 2018. We made the payment during August 2020.


On March 3, 2020, we entered into the 2020 Aspire Purchase Agreement, later
amended on April 9, 2020, with Aspire Capital under which Aspire Capital
purchased $30.0 million of shares of our common stock. The 2020 Aspire Purchase
Agreement terminated and replaced the 2019 Aspire Purchase Agreement.




Included in Other long-term assets as of September 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 in China.
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 each December 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 to November 23, 2021.



Cash Flows - Continuing Operating Activities




During the nine months ended September 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 ended September 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 of Vegas.com in the prior year period.



Cash Flows - Financing Activities




During the nine months ended September 30, 2020, we received $32.0 million from
sales of shares of our common stock reflecting more activity under our
agreements with Aspire 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 ended September
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 of Vegas.com in 2015; $0.9 million of the payment was
reflected as a financing activity.


Table of Contents 29




--------------------------------------------------------------------------------



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.

© Edgar Online, source Glimpses

© Acquiremedia 2021
Copier lien
All news about REMARK HOLDINGS, INC.
6d ago
01/06
12/30
12/30
12/21