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

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2021

https://cdn.kscope.io/09126c37ee304dfcb4a6866604973d65-mark-20210630_g1.jpg
Commission File Number 001-33720
Remark Holdings, Inc.
Delaware33-1135689
State of IncorporationIRS Employer Identification Number

800 S. Commerce St.
Las Vegas, NV 89106

Address, including zip code, of principal executive offices

702-701-9514

Registrant’s telephone number, including area code


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par value per shareMARKThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of August 20, 2021, a total of 100,795,434 shares of our common stock were outstanding.



TABLE OF CONTENTS

PART I
Item 1.
Financial Statements
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this report and other periodic reports filed with the Securities and Exchange Commission (“SEC”), there are many important factors that could cause actual results to differ materially. Such risks and uncertainties include general business conditions, changes in overall economic conditions, our ability to integrate acquired assets, the impact of competition and other factors which are often beyond our control.

This should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, operations, liquidity, financial condition and prospects. We undertake no obligation to update or revise our forward-looking statements to reflect developments that occur or information that we obtain after the date of this report.





PART I FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
June 30, 2021December 31, 2020
(Unaudited)
Assets
Cash (includes VIE $60 and $278, respectively)
$122 $854 
Trade accounts receivable, net (includes VIE $7,788 and $4,850, respectively)
8,045 5,027 
Inventory, net (includes VIE $58 and $112, respectively)
1,925 874 
Prepaid expense and other current assets (includes VIE $819 and $248, respectively)
1,436 2,043 
Total current assets11,528 8,798 
Property and equipment, net (includes VIE $ and $43, respectively)
264 321 
Operating lease assets (includes VIE $173 and $281, respectively)
330 492 
Investment in unconsolidated affiliate1,030 1,030 
Other long-term assets (includes VIE $29 and $68, respectively)
581 670 
Total assets$13,733 $11,311 
Liabilities and Stockholders’ Deficit
Accounts payable (includes VIE $5,631 and $3,655, respectively)
$11,112 $8,589 
Accrued expense and other current liabilities (includes VIE $3,386 and $3,782, respectively)
7,539 6,660 
Contract liability (includes VIE $187 and $147, respectively)
590 310 
Notes payable, net of unamortized discount and debt issuance cost6,167 1,500 
Total current liabilities25,408 17,059 
Loans payable1,425 1,425 
Operating lease liabilities, long-term (includes VIE $26 and $79, respectively)
98 194 
Warrant liability2,013 1,725 
Total liabilities28,944 20,403 
Commitments and contingencies
Preferred stock, $0.001 par value; 1,000,000 shares authorized; zero issued
  
Common stock, $0.001 par value; 100,000,000 shares authorized; 99,918,941 and 99,505,041 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively
100 100 
Additional paid-in-capital352,394 351,546 
Accumulated other comprehensive income(171)(226)
Accumulated deficit(367,534)(360,512)
Total stockholders’ deficit(15,211)(9,092)
Total liabilities and stockholders’ deficit$13,733 $11,311 
See Notes to Unaudited Condensed Consolidated Financial Statements
1
Financial Statement Index

REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(dollars in thousands, except per share amounts)
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Revenue$4,016 $2,299 $8,422 $2,730 
Cost and expense
Cost of revenue (excluding depreciation and amortization)2,252 1,210 5,004 1,231 
Sales and marketing398 486 1,399 902 
Technology and development1,305 1,477 2,855 2,125 
General and administrative2,482 1,898 5,179 4,638 
Depreciation and amortization49 66 115 156 
Total cost and expense6,486 5,137 14,552 9,052 
Operating loss(2,470)(2,838)(6,130)(6,322)
Other income (expense)
Interest expense(380)(775)(615)(1,236)
Other income, net6 57 7 57 
Change in fair value of warrant liability1,322 (6,260)(288)(6,203)
Gain on lease termination   1,538 
Other income (loss), net(30) 13 (73)
Total other income (expense), net918 (6,978)(883)(5,917)
Loss from operations$(1,552)$(9,816)$(7,013)$(12,239)
Provision for income taxes(9) (9) 
Net loss$(1,561)$(9,816)$(7,022)$(12,239)
Other comprehensive loss
Foreign currency translation adjustments13 156 55 338 
Comprehensive loss$(1,548)$(9,660)$(6,967)$(11,901)
Weighted-average shares outstanding, basic and diluted99,917 89,264 99,838 71,527 
Net loss per share, basic and diluted$(0.02)$(0.11)$(0.07)$(0.17)
See Notes to Unaudited Condensed Consolidated Financial Statements
2
Financial Statement Index

REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders’ Deficit
(in thousands, except number of shares)
Three Months Ended June 30, 2021
Common Stock SharesCommon Stock Par ValueAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Balance at March 31, 202199,916,941 $100 $352,387 $(184)$(365,973)(13,670)
Net loss— — — — (1,561)(1,561)
Share-based compensation— — 6 — — 6 
Common stock issued— — — — — — 
Equity instrument exercises2,000 — 1 — — 1 
Foreign currency translation— — — 13 — 13 
Balance at June 30, 202199,918,941 $100 $352,394 $(171)$(367,534)$(15,211)
Three Months Ended June 30, 2020
Common Stock SharesCommon Stock Par ValueAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Balance at March 31, 202066,133,888 $66 $323,958 $(45)$(349,250)$(25,271)
Net loss— — — — (9,816)(9,816)
Share-based compensation— — 47 — — 47 
Common stock issued33,220,164 33 27,345 — — 27,378 
Equity instrument exercises54,864 — 67 — — 67 
Foreign currency translation— — — 156 — 156 
Balance at June 30, 202099,408,916 $99 $351,417 $111 $(359,066)$(7,439)
Six Months Ended June 30, 2021
Common Stock SharesCommon Stock Par ValueAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Balance at December 31, 202099,505,041 $100 $351,546 $(226)$(360,512)$(9,092)
Net loss— — — — (7,022)(7,022)
Share-based compensation— — 25 — — 25 
Common stock issued— — — — — — 
Equity instrument exercises413,900 — 823 — — 823 
Other— — — 55 — 55 
Balance at June 30, 202199,918,941 $100 $352,394 $(171)$(367,534)$(15,211)
Six Months Ended June 30, 2020
Common Stock SharesCommon Stock Par ValueAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Balance at December 31, 201951,055,159 $51 $319,275 $(227)$(346,827)$(27,728)
Net loss— — — — (12,239)(12,239)
Share-based compensation— — 93 — — 93 
Common stock issued48,298,893 48 31,982 — — 32,030 
Equity instrument exercises54,864 — 67 — — 67 
Other— — — 338 — 338 
Balance at June 30, 202099,408,916 $99 $351,417 $111 $(359,066)$(7,439)

See Notes to Unaudited Condensed Consolidated Financial Statements
3
Financial Statement Index

REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
Six Months Ended June 30,
20212020
Cash flows from operating activities:
Net loss
$(7,022)$(12,239)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of warrant liability
288 6,203 
Depreciation, amortization and impairments
115 156 
Share-based compensation
98 681 
Amortization of debt issuance costs and discount
182  
Loss on disposal of long-lived assets
30 72 
Other
44 587 
Changes in operating assets and liabilities:
Accounts receivable
(2,915)(315)
Inventory(1,051)(1,355)
Prepaid expenses and other assets
672 (842)
Operating lease assets
162 3,886 
Accounts payable
2,942 (1,891)
Deferred revenue
280 257 
Operating lease liabilities
(96)(4,447)
Net cash used in operating activities
$(6,271)$(9,247)
Cash flows from investing activities:
Purchases of property, equipment and software
(54)(9)
Net cash used in investing activities
(54)(9)
Cash flows from financing activities:
Proceeds from issuance of common stock, net
823 32,073 
Proceeds from debt issuance
4,770 425 
Repayments of debt
 (13,281)
Net cash provided by financing activities
5,593 19,217 
Net change in cash
(732)9,961 
Cash:
Beginning of period
854 272 
End of period
$122 $10,233 
Supplemental schedule of non-cash investing and financing activities:
Addition of interest to debt principal
$ $256 
Recognition of debt issuance costs
$285 $ 

See Notes to Unaudited Condensed Consolidated Financial Statements
4
Financial Statement Index

REMARK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1. ORGANIZATION AND BUSINESS

Organization and Business

Remark Holdings, Inc. and subsidiaries (“Remark”, “we”, “us”, or “our”), which include its consolidated variable-interest entities (“VIEs”), are primarily technology-focused. Our KanKan data intelligence platform serves as the basis for our development and deployment of artificial-intelligence-based (“AI-based”) solutions for businesses in many industries and geographies. We also own and operate an e-commerce digital media property focused on a luxury beach lifestyle. Our common stock is listed on the Nasdaq Capital Market under the ticker symbol MARK.

We recognize revenue primarily from sales in the U.S. and China of AI-based products and services from our KanKan business.


Economic and political risks

Our operations in China are subject to special considerations and significant risks not typically associated with companies in North America, including risks associated with, among others, the political, economic and legal environment and foreign currency exchange. Our results may be adversely affected by changes in the political conditions in China, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.


COVID-19

Our unaudited condensed consolidated interim financial statements for the six months ended June 30, 2021 were impacted by the effects of the COVID-19 pandemic, which 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, closures of non-essential businesses and other quarantine measures. The preventative measures have limited our operational capabilities, which could have a material adverse impact on our business and which have created significant uncertainties, such as the potential adverse effect of the pandemic on the economy, our vendors, our employees and customers and customer sentiment in general.

The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration and severity of the pandemic, the duration of 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 is changing rapidly, and additional impacts of which we are not currently aware may arise, as recently underscored by the surge in cases in the U.S., India and portions of South America. We are closely monitoring worldwide developments and are continually assessing the potential impact on our business.

 
Going Concern
 
During the six months ended June 30, 2021, and in each fiscal year since our inception, we have incurred net losses which have resulted in stockholders’ deficit of $15.2 million as of June 30, 2021. Additionally, our operations have historically used more cash than they have provided. Net cash used in operating activities was $6.3 million during the six months ended June 30, 2021. As of June 30, 2021, our cash balance was $0.1 million, and we had a negative working capital balance of $13.9 million and total stockholders’ deficit of $15.2 million.

Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities give rise to, and management has concluded that there is, substantial doubt regarding our ability to continue as a going concern. Our independent registered public accounting firm, in its report on our consolidated financial statements for the year ended December 31, 2020, has also expressed substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

5
Financial Statement Index


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 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 debt and/or 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 August 23, 2022.


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of June 30, 2021, with the audited Consolidated Balance Sheet amounts as of December 31, 2020 presented for comparative purposes, and the related unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss, the Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Stockholders’ Deficit in accordance with the instructions for Form 10-Q. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.

Our results of operations and our cash flows as of the end of the interim periods reported herein do not necessarily indicate the results we may experience for the remainder of the year or for any other future period.

Management believes that we have included all adjustments (including those of a normal, recurring nature) considered necessary to fairly present our unaudited Condensed Consolidated Balance Sheet and our unaudited Condensed Consolidated Statement of Stockholders’ Deficit, each as of June 30, 2021, as well as our unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss and Condensed Consolidated Statements of Cash Flows for all periods presented. You should read our unaudited condensed consolidated interim financial statements and footnotes in conjunction with our consolidated financial statements and footnotes included within the Annual Report on Form 10-K (the “2020 Form 10-K”).


Consolidation

We include all of our subsidiaries, including the VIEs for which we are the primary beneficiary, in our condensed consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.

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To comply with China’s laws which restrict foreign ownership of entities that operate within industries deemed sensitive by the Chinese government, we employ what we believe is a commonly-used organizational structure consisting of a wholly-foreign owned enterprise (“WFOE”) and the VIEs to operate our KanKan business. We own 100% of the equity of the WFOE, while the VIEs are companies formed in China under local laws which are owned by members of our management team. We funded the registered capital and operating expenses of the VIEs by extending loans to the VIEs’ owners. We are the primary beneficiary of the VIEs because the relationships between the VIEs and our WFOE are governed by contractual agreements, including in each case an Exclusive Call Option Agreement, an Exclusive Business Cooperation Agreement, a Proxy Agreement and an Equity Pledge Agreement, which give us control over the operations of the VIEs.

We use the fair value method to account for equity investments in which we cannot exercise significant influence over the investee, such as with our investment in Sharecare, Inc. (“Sharecare”). With regard to our investment in Sharecare, GAAP allows us to continue to carry our investment at cost less impairment until such time as an observable price change in the underlying security occurs. Any gains or losses resulting from a change in fair value are recorded to the statement of operations (see Note 6 and Note 14 for more information on this investment).
 

Use of Estimates
 
We prepare our consolidated financial statements in conformity with GAAP. While preparing our financial statements, we make estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and accompanying notes. Accordingly, actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, share-based compensation, the fair value of the warrant liability, deferred income taxes, and inventory reserve, among other items.

The impact of the COVID-19 pandemic continues to unfold. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.


Cash

Our cash consists of funds held in bank accounts.

We maintain cash balances in United States dollars (“USD”), Chinese Renminbi (“RMB”), and Hong Kong dollars (“HKD”). The following table, reported in USD, disaggregates our cash balances by currency denomination (in thousands):
June 30, 2021December 31, 2020
Cash denominated in:
USD$47 $563 
HKD6 8 
RMB69 283 
Total cash$122 $854 


We maintain substantially all of our USD-denominated cash at a U.S financial institution where the balances are insured by the Federal Deposit Insurance Corporation up to $250,000. At times, however, our cash balances may exceed the FDIC-insured limit. As of June 30, 2021, we do not believe we have any significant concentrations of credit risk. Cash held by our non-U.S. subsidiaries is subject to foreign currency fluctuations against the USD, although such risk is somewhat mitigated because we transfer U.S. funds to China to fund local operations. If, however, the USD is devalued significantly against the RMB, our cost to further develop our business in China could exceed original estimates.


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Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price). When reporting the fair values of our financial instruments, we prioritize those fair value measurements into one of three levels based on the nature of the inputs, as follows:

Level 1:    Valuations based on quoted prices in active markets for identical assets and liabilities;

Level 2:    Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and observable market data for similar, but not identical instruments; and

Level 3:    Valuations based on unobservable inputs, which are based upon the best available information when external market data is limited or unavailable.

The fair value hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. For some products or in certain market conditions, observable inputs may not be available.

We believe the reported carrying amounts for cash and cash equivalents, receivables, prepaids and other current assets, accounts payable, accrued expenses and other current liabilities, approximate their fair values because of the short-term nature of these financial instruments.


Foreign Currency Translation

We report all currency amounts in USD. Our China VIEs, however, maintain their books and records in their functional currency, which is RMB.

In general, when consolidating our subsidiaries or VIEs with non-USD functional currencies, we translate the amounts of assets and liabilities into USD using the exchange rate on the balance sheet date, and the amounts of revenue and expense are translated at the average exchange rate prevailing during the period. The gains and losses resulting from translation of financial statement amounts into USD are recorded as a separate component of accumulated other comprehensive loss within stockholders’ deficit.

We used the exchange rates in the following table to translate amounts denominated in non-USD currencies as of and for the periods noted:
20212020
Exchange rates at June 30th:
RMB:USD0.155 0.141 
HKD:USD0.129 0.129 
Average exchange rate during the six months ended June 30th:
RMB:USD0.154 0.143 


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Revenue Recognition

AI-Based Products

We generate revenue by developing AI-based products, including fully-integrated AI solutions which combine our proprietary technology with third-party hardware and software products to meet end-user specifications. Under one type of contract for our AI-based products, we provide a single, continuous service to clients who control the assets as we create them. Accordingly, we recognize the revenue over the period of time during which we provide the service. Under another type of contract, we have performance obligations to provide fully-integrated AI solutions to our customer and we recognize revenue at the point in time when each performance obligation is completed and delivered to, tested by and accepted by our customer.

We recognize revenue when we transfer control of the promised goods or services to our customers, and we recognize an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. If there is uncertainty related to the timing of collections from our customer, which may be the case if our customer is not the ultimate end user of our goods, we consider this to be uncertainty of the customer’s ability and intention to pay us when consideration is due. Accordingly, we recognize revenue only when we have transferred control of the goods or services and consideration received from the customer is nonrefundable.

When customers pay us prior to when we satisfy our obligation to transfer control of promised goods or services, we record the amount that reflects the consideration to which we expect to be entitled as a contract liability until such time as we satisfy our performance obligation.

For our contracts with customers, we generally extend short-term credit policies to our customers, typically up to one year for large-scale projects.

We record the incremental costs of obtaining contracts as an expense when incurred, because such costs would otherwise be amortized over a period of less than one year if capitalized.


Other

We generate revenue from other sources, such as from advertising and marketing services, e-commerce activity in which we sell goods to our customers, or media production which involves the production of video or Internet-based content for our customers. We recognize the revenue from these contracts at the point in time when we transfer control of the good sold to the customer or when we deliver the promised promotional materials or media content. Substantially all of our contracts with customers that generate Other revenue are completed within one year or less.


Inventory

We use the first-in first-out method to determine the cost of our inventory, then we report inventory at the lower of cost or net realizable value. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated sales forecasts.


Net Loss per Share

We calculate basic net loss per share using the weighted-average number of common stock shares outstanding during the period. For the calculation of diluted net loss per share, we give effect to all the shares of common stock that were outstanding during the period plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is anti-dilutive. Dilutive potential shares of common stock consist of incremental shares of common stock issuable upon exercise of stock options and warrants.

For the three and six months ended June 30, 2021 and 2020, there were no reconciling items related to either the numerator or denominator of the loss per share calculation, as their effect would have been anti-dilutive.

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Securities which would have been anti-dilutive to a calculation of diluted earnings per share for the three and six months ended June 30, 2021 and 2020 include 9,526,565 and 10,216,840 outstanding stock options, respectively, and 40,000 and 6,641,558 outstanding stock warrants, respectively.


Segments

Existing GAAP, which establishes a management approach to segment reporting, defines operating segments as components of an entity about which separate, discrete financial information is available for evaluation by the chief operating decision maker. We have identified our Chief Executive Officer as our chief operating decision maker, who reviews operating results to make decisions about allocating resources and assessing performance based upon only one operating segment.


Liabilities Related to Warrants Issued
 
We record certain common stock warrants we issued (see Note 4 for more detailed information) at fair value and recognize the change in the fair value of such warrants as a gain or loss which we report in the Other income (expense) section in our consolidated statement of operations. We report the warrants that we record at fair value as liabilities because they contain a conditional promise to issue a variable number of our common stock shares upon the warrants’ expiration, and the monetary amount of such obligation was fixed at the inception of the contract. We estimate the fair value of the warrants using an option pricing model.


Recently Issued Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06 (“ASU 2020-06”), Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The ASU also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. With regard to our financial reporting, ASU 2020-06 will be effective January 1, 2024, and early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. We are currently evaluating what effect(s) the adoption of ASU 2020-06 may have on our consolidated financial statements, but we do not believe the impact of the ASU will be material to our financial position, results of operations and cash flows. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). The ASU requires entities to use a forward-looking approach based on current expected credit losses to estimate credit losses on certain types of financial instruments, including trade receivables, which may result in the earlier recognition of allowances for losses. With regard to our financial reporting, ASU 2016-13 will be effective beginning January 1, 2023, and early adoption is permitted. We do not believe the impact of the ASU will be material to our financial position, results of operations and cash flows.

We have reviewed all accounting pronouncements recently issued by the FASB and the Securities and Exchange Commission. The authoritative pronouncements that we have already adopted did not have a material effect on our financial condition, results of operations, cash flows or reporting thereof, and except as otherwise noted above, we do not believe that any of the authoritative pronouncements that we have not yet adopted will have a material effect upon our financial condition, results of operations, cash flows or reporting thereof.


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NOTE 3. REVENUE

We sell AI-based products that include our Remark AI Thermal Kits and rPads in the U.S., as well as the various customized products we sell in China based upon facial recognition, gesture recognition and other technologies.

We do not include disclosures related to remaining performance obligations because substantially all our contracts with customers have an original expected duration of one year or less or, with regard to our stand-ready obligations, the amounts involved are not material.


Disaggregation of Revenue

The following table presents a disaggregation of our revenue by major category (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
AI-based products$3,852 $2,053 $7,872 $2,377 
Other164 246 550 353 
Revenue$4,016 $2,299 $8,422 $2,730 


The following table presents a disaggregation of our revenue by country (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
China$1,418 $987 $5,135 $1,311 
United States2,598 1,312 3,287 1,419 
Revenue$4,016 $2,299 $8,422 $2,730 


Significant Judgments

When accounting for revenue we make certain judgments, such as whether we act as a principal or as an agent in transactions or whether our contracts with customers fall within the scope of current GAAP regarding revenue, that affect the determination of the amount and timing of our revenue from contracts with customers. Based on the current facts and circumstances related to our contracts with customers, none of the judgments we make involve an elevated degree of qualitative significance or complexity such that further disclosure is warranted in terms of their potential impact on the amount and timing of our revenue.


Contract Assets and Contract Liabilities

We do not currently generate material contract assets. During the six months ended June 30, 2021, our contract liability changed only as a result of routine business activity.

During the six months ended June 30, 2021 and 2020, we did not recognize a material amount of revenue which was included in the beginning balance of Contract liability.

During the six months ended June 30, 2021 and 2020, we did not recognize revenue from performance obligations that were satisfied in previous periods.

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NOTE 4. FAIR VALUE MEASUREMENTS OF CERTAIN LIABILITIES

Liabilities Related to Warrants to Purchase Common Stock

At the end of each reporting period, until expiry, we use an option pricing model to estimate and report the fair value of liabilities related to certain outstanding warrants to purchase common stock. As of June 30, 2021, our outstanding liability-classified warrants include the warrants we issued or that we are obligated to issue as part of the consideration for our acquisition (the “CBG Acquisition”) of assets of China Branding Group Limited (“CBG”) in September 2016 (the “CBG Acquisition Warrants”). The warrants we issued in connection with the financing we obtained for the CBG Acquisition (referred to in our prior reports as the CBG Financing Warrants) expired on September 24, 2020 without being exercised; therefore, the balance of $2.0 million as of June 30, 2021 represents the liability associated with the CBG Acquisition Warrants.

The following table presents the quantitative inputs, which we classify in Level 3 of the fair value hierarchy, used in estimating the fair value of the CBG Acquisition Warrants:
June 30, 2021December 31, 2020
Expected volatility100.00 %85.00 %
Risk-free interest rate0.27 %0.18 %
Expected remaining term (years)2.232.73


The following table presents the change in the liability balance associated with our liability-classified warrants (in thousands):
Six Months Ended June 30,
Year Ended December 31,
20212020
Balance at beginning of period
$1,725 $115 
Expiration of warrants (115)
Increase (decrease) in fair value
288 1,725 
Balance at end of period
$2,013 $1,725 


As of June 30, 2021 and December 31, 2020, warrants outstanding included CBG Acquisition Warrants which may be exercised to purchase 40,000 shares of our common stock at a per-share exercise price of $10.00 (we are also committed to the future issuance of additional CBG Acquisition Warrants to purchase up to 5,710,000 of the Company’s common shares at the same per-share exercise price as the CBG Acquisition Warrant that has already been issued). See Note 12 for more information regarding the CBG Acquisition Warrants to purchase up to 5,710,000 of the Company’s common shares, which are the subject of ongoing litigation.


NOTE 5. TRADE ACCOUNTS RECEIVABLE
June 30, 2021December 31, 2020
Gross accounts receivable balance$8,938 $5,988 
Allowance for bad debt(893)(961)
Accounts receivable, net$8,045 $5,027 


Generally, it is not unusual for Chinese entities to pay their vendors on longer timelines than the timelines typically observed in U.S. commerce. Trade receivables related to our China-based AI projects represent 97% of our gross trade receivables.

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NOTE 6. INVESTMENT IN UNCONSOLIDATED AFFILIATE

In 2009, we co-founded a U.S.-based venture, Sharecare, to build a web-based platform that simplifies the search for health and wellness information. The other co-founders of Sharecare were Dr. Mehmet Oz, HARPO Productions, Discovery Communications, Jeff Arnold and Sony Pictures Television. As of June 30, 2021 and December 31, 2020, the value of our investment in Sharecare was $1.0 million, and we maintained representation on its Board of Directors through June 30, 2021. See Note 14 for an update to our investment in Sharecare that occurred following the end of the period covered by this report.


NOTE 7. PREPAID EXPENSE AND OTHER CURRENT ASSETS

The following table presents the components of prepaid expense and other current assets (in thousands):
June 30, 2021December 31, 2020
Other receivables
$591 $8 
Prepaid expense
508 1,877 
Deposits
158 50 
Other current assets
179 108 
Total
$1,436 $2,043 


NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands, except estimated lives):
Estimated Life
(Years)
June 30, 2021December 31, 2020
Computers and equipment31,098 1,097 
Furniture and fixtures342 42 
Software35,027 5,006 
Leasehold improvements3197 174 
Total property, equipment and software$6,364 $6,319 
Less accumulated depreciation(6,100)(5,998)
Total property, equipment and software, net$264 $321 


For the six months ended June 30, 2021 and 2020, depreciation (and amortization of software) expense was $0.1 million and $0.1 million, respectively.



NOTE 9. LEASES

We lease office space and a vehicle under contracts we classify as operating leases. None of our leases are financing leases.

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The following table presents the detail of our lease expense, which is reported in General and administrative expense (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Operating lease expense
$61 $83 $163 $471 
Short-term lease expense
369 47 630 122 
Lease expense
$430 $130 $793 $593 


We reported within operating cash flows for the six months ended June 30, 2021 and 2020, $0.1 million and $0.1 million, respectively, of cash paid for amounts included in the measurement of operating lease liabilities.

As of June 30, 2021, our operating leases had a weighted-average remaining lease term of approximately 16 months, and we used a weighted-average discount rate of approximately 13% to measure our operating lease liabilities.


Maturity of Lease Liabilities

The following table presents information regarding the maturities of our undiscounted remaining operating lease payments, with a reconciliation to the amount of the liabilities representing such payments as presented in our June 30, 2021 unaudited Condensed Consolidated Balance Sheet (in thousands):
Operating lease liabilities maturing during the next:
One year$283 
Two years103 
Total undiscounted cash flows$386 
Present value of cash flows$347 
Lease liabilities on balance sheet:
Short-term (included in accrued expenses)
$249 
Long-term98 
Total lease liabilities$347 


Other

In March 2021, we prepaid the lease expense for short-term leases on properties in the Los Angeles, California and Miami, Florida areas; approximately $0.2 million remained in the balance of Prepaid expense and other current assets as of June 30, 2021.


Significant Judgments

When accounting for our leases, we make certain judgments, such as whether a contract contains a lease or what discount rate to use, that affect the determination of the amount of our lease assets and liabilities. Based on the current facts and circumstances related to our contracts, none of the judgments we make involve an elevated degree of qualitative significance or complexity such that further disclosure is warranted.


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NOTE 10. ACCRUED EXPENSE AND OTHER CURRENT LIABILITIES

The following table presents the components of Accrued expense and other current liabilities (in thousands):
June 30, 2021December 31, 2020
Accrued compensation and benefit-related expense$1,438 $1,151 
Accrued interest813 485 
Other accrued expense1,175 721 
Other payables2,917 3,048 
Operating lease liability - current249 382 
Other current liabilities947 873 
Total
$7,539 $6,660 


NOTE 11. DEBT

Short-Term Debt

The following table presents our notes payable (in thousands) as of:
June 30, 2021December 31, 2020
Note payable to private lender$1,500 $1,500 
Note payable to Jefferson Remark Funding LLC5,000  
Principal balance of notes payable6,500 1,500 
Unamortized discount and debt issuance cost(333) 
Notes payable, net of unamortized discount and debt issuance cost$6,167 $1,500 


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 each of June 30, 2021 and December 31, 2020, the note was past due and accrued interest was $0.6 million.

On February 10, 2021, we entered into a senior secured promissory note (the “Note”) with certain of our subsidiaries as guarantors (the “Guarantors”) and Jefferson 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 on March 31, 2021. The entire principal balance, as well as any unpaid accrued interest thereon, is due and payable in full on February 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. The net cash proceeds to us under the promissory note were $4.8 million, net of a $0.2 million discount, and we incurred debt issuance cost of $0.3 million. During the three and six months ended June 30, 2021, we recognized amortization expense of $0.1 million and $0.2 million, respectively, resulting in an unamortized discount and debt issuance cost balance of $0.3 million at June 30, 2021.


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Long-Term Debt

The following table presents our long-term debt (in thousands) as of:
June 30, 2021December 31, 2020
Private lender loan due December 2023$1,000 $1,000 
PPP loan due April 2022425 425 
Loans payable, long-term$1,425 $1,425 


Loan due April 2022

On April 15, 2020, we entered into a loan agreement (the “PPP Loan”) with our bank under the U.S. Small Business Administration’s Paycheck Protection Program. Under the PPP Loan, we borrowed $0.4 million with a stated interest rate of one percent for a term of two years from the initial disbursement date of April 15, 2020. The PPP Loan is eligible for forgiveness as part of the CARES Act if certain requirements are met. As of June 30, 2021, the PPP Loan had an outstanding principal balance of $0.4 million included in loans payable. See Note 14 for an update about an event related to the PPP Loan that occurred following the end of the period covered by this report.


Loan due December 2023

On December 30, 2020, we executed a promissory note with a private lender (the “Private Lender Loan”) under which we borrowed $1.0 million. The Private Lender Loan bears interest at 10% per annum. The entire principal balance, as well as any interest accrued thereon, is due and payable in full on December 30, 2023, or such earlier date as the principal may become due and payable pursuant to the terms of the Private Lender Loan. See Note 14 for an update about an event related to the Private Lender Loan that occurred following the end of the period covered by this report.


NOTE 12. COMMITMENTS AND CONTINGENCIES

At June 30, 2021, we had no material commitments outside the normal course of business, other than as described below.

During 2020, we advanced $1.5 million to an unrelated entity (our “China Business Partner”) pursuant to an 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 executed 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, though we do have the option to terminate the loan agreement at any time prior to converting the outstanding principal and accrued interest into equity interests of our China Business Partner. The business purpose for the loan was to allow our China Business Partner to purchase and modify hardware to integrate with our software and market such integrated product to potential customers. We are currently in the process of formalizing a more formal business relationship with our China Business Partner. We determined that advances under the loan agreement were effectively marketing costs because realizability of the loan was uncertain given the lack of a formalized business relationship with our China Business Partner and the nature of the use of funds.

During the six months ended June 30, 2021, we advanced an additional $1.3 million to the China Business Partner, which we included in Sales and marketing expense. Any advances we make under the executed agreement with the China Business Partner will bear a simple interest rate of 10% per annum, payable before each December 31st during the term of the agreement, and will be convertible at our election into equity of the China Business Partner upon any equity financing our China Business Partner undertakes during the term of the agreement. The Sales and marketing expense we incurred with our China Business Partner was partially offset by approximately $0.6 million resulting from our completion of certain initial orders from a client that resulted from the efforts of our China Business Partner and us. Because we provided the advances to our China Business Partner for the business development efforts that resulted in the customer orders, we have recorded the $0.6 million as an offset to the expense.
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Contingencies

As of June 30, 2021, we were neither a defendant in any material pending legal proceeding nor are we aware of any material threatened claims against us and, therefore, we have not accrued any contingent liabilities.

CBG Litigation

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

We entered into a settlement agreement with Mr. Roseman to settle all claims against him, and we dismissed those claims on May 13, 2019. We entered into a Stipulation for Settlement dated January 15, 2019 with CBG and the JOLs, which sets forth the binding terms of their settlement agreement (the “Stipulation for Settlement”). Pursuant to the Stipulation for Settlement, we will issue fully-transferable warrants on a non-diluted basis allowing for the purchase of 5,710,000 shares of our common stock at a per-share exercise price of $6.00, which warrants are exercisable for a period of 5 years from the date of the Stipulation for Settlement, and which we have the right to cause the warrant holders to exercise if the closing price of our common stock is $8.00 or greater on any 5 non-consecutive days in any consecutive 30-day trading window. The parties to the Stipulation for Settlement also agreed to negotiate anti-dilution provisions for the warrants. In exchange for the foregoing consideration, the parties to the Stipulation for Settlement agreed to release their claims against each other and enter into a written definitive settlement agreement. After entering into the Stipulation for Settlement, the JOLs demanded the warrants also include an exchange right. We rejected this request and filed a motion to enforce the Stipulation for Settlement on March 12, 2019. The Nevada court issued a report and recommendation on August 2, 2019, which was affirmed on September 24, 2019, requiring the JOLs to submit the written definitive settlement agreement (without an exchange right) to the Grand Court of the Cayman Islands overseeing CBG’s liquidation for approval. An application for sanction to enter the settlement agreement was filed with the Grand Court on December 3, 2019. One month later, on or about January 2, 2020, the Grand Court approved the application, authorizing CBG and the JOLs to enter into the settlement. Counsel for the parties are currently finalizing the settlement agreement.


NOTE 13. STOCKHOLDERS' EQUITY, SHARE-BASED COMPENSATION AND NET LOSS PER SHARE

Share-Based Compensation 

We are authorized to issue equity-based awards under our 2014 Incentive Plan and our 2017 Incentive Plan, each of which our stockholders have approved. We also award cash bonuses (“China Cash Bonuses”) to our employees in China, which grants are not subject to a formal incentive plan and which can only be settled in cash. We grant such awards to attract, retain and motivate eligible officers, directors, employees and consultants. Under each of the plans, we have granted shares of restricted stock and options to purchase common stock to our officers and employees with exercise prices equal to or greater than the fair value of the underlying shares on the grant date.

Stock options and China Cash Bonuses generally expire 10 years from the grant date. All forms of equity awards and China Cash Bonuses vest upon the passage of time, the attainment of performance criteria, or both. When participants exercise stock options, we issue any shares of our common stock resulting from such exercise from new authorized and unallocated shares available at the time of exercise.

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The following table summarizes activity under our equity incentive plans related to equity-classified stock option grants as of June 30, 2021, and changes during the six months then ended:
SharesWeighted-Average Exercise PriceWeighted-Average Remaining Contractual Term
(in years)
Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 20219,942,341 $4.29 
Exercised(413,900)1.99 
Forfeited, cancelled or expired(1,876)1.40 
Outstanding at June 30, 20219,526,565 $4.39 5.2$682 
Options exercisable at June 30, 20219,501,565 $4.40 5.2$651 


The following table summarizes activity under our equity incentive plans related to the China Cash Bonuses as of June 30, 2021, and changes during the six months then ended:
SharesWeighted-Average Exercise PriceWeighted-Average Remaining Contractual Term
(in years)
Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 20201,055,000 $4.01 
Granted  
Forfeited, cancelled or expired  
Outstanding at June 30, 20211,055,000 $4.01 5.9$185 
Options exercisable at June 30, 2021845,000 $4.67 5.1$82 


The following table presents the change in the liability balance associated with our China Cash Bonuses (in thousands):
Six Months Ended June 30,
Year Ended December 31,
20212020
Balance at beginning of period
$679 $43 
Share-based compensation expense related to China Cash Bonuses
74 636 
Balance at end of period
$753 $679 


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On July 27, 2020, we granted to employees and directors, excluding our CEO, options to purchase approximately 5.4 million shares of our common stock. The option agreements governing the grants contain a stipulation that, regardless of vesting, such options do not become exercisable unless and until stockholders approve an amendment to our Amended and Restated Certificate of Incorporation to increase in the number of authorized shares of our common stock in an amount sufficient to allow for the exercise of the options and we have filed a corresponding Certificate of Amendment to our Amended and Restated Certificate of Incorporation reflecting such increase in the number of authorized shares of our common stock. As a result of such stipulation, we determined that a grant date, as defined in GAAP, has not yet occurred regarding the stock options awarded on July 27, 2020 given the requirement for stockholder approval of additional authorized shares to make the stock options exercisable. We have neither measured the fair value of such stock options, recorded stock compensation expense related to such stock options nor reflected them as granted in the table above. See Note 14 for an update relating to the July 27, 2020 option grants that occurred following the end of the period covered by this report.

During the three months ended June 30, 2021 and 2020, we incurred share-based compensation expense of $(0.2) million and $0.6 million, respectively. During the six months ended June 30, 2021 and 2020, we recorded share-based compensation expense of $0.1 million and $0.7 million, respectively.


NOTE 14. SUBSEQUENT EVENTS

Investment in Sharecare

On July 1, 2021, Sharecare, Inc., a Delaware corporation (“Legacy Sharecare”), completed a business combination with Falcon Capital Acquisition Corp., a special purpose acquisition company, as a result of which the common stock of the surviving entity of such business combination (“New Sharecare”) became listed on the Nasdaq Stock Market LLC. In connection with the completion of such business combination, the shares of common stock of Legacy Sharecare that we held immediately prior to the business combination converted into approximately $2.3 million in cash and approximately 9.4 million shares of common stock of New Sharecare. We do not maintain a seat on the board of directors of New Sharecare.


Increase in Authorized Shares and Valuation of July 2020 Stock Option Grants

On July 8, 2021, we held a special meeting of stockholders (the “Special Meeting”). At the Special Meeting, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock to 175,000,000, and we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation (the “Charter Amendment”) with the Secretary of State of the State of Delaware on July 9, 2021 to reflect this amendment, which became effective immediately upon filing.

As a result of the increase in the number of authorized shares of our common stock, we determined that July 8, 2021 was the grant date for the stock options we originally issued to employees and directors on July 27, 2020. The stock options originally granted allowing for the purchase of approximately 5.4 million shares have a grant date fair value of approximately $6.3 million.


Forgiveness of PPP Loan

On July 23, 2021, the lender of our PPP Loan notified us that the U.S. Small Business Administration had forgiven our $0.4 million PPP Loan, plus a de minimis amount of accrued interest thereon, effective as of July 21, 2021.


Amendment to Note Payable Allowing Conversion

Effective August 5, 2021, we entered into an amendment (the “Note Amendment”) to the Private Lender Loan. The Note Amendment provided that effective as of August 5, 2021 (the “Conversion Date”), the outstanding principal amount of the Private Lender Loan plus all accrued but unpaid interest thereon through the Conversion Date was automatically converted into shares of our common stock at a conversion price of $1.21 per share, resulting in the issuance of 876,493 shares of our common stock.
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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read our discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 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 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. 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.

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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

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 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 Europe, where we see a tremendous number of requests for AI products and solutions in the workplace and public safety markets. 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 half of 2021, we continued working to expand our biosafety business within the U.S., and though we expected to do so quickly, the rise in COVID-19 vaccination rates and significant decrease in new reported COVID-19 cases had a negative impact on demand for our AI-driven thermal imaging solutions. Also, the absence of a regulatory mandate for businesses to buy and implement solutions such as ours contributed to the slowing of what originally was steady growth in our biosafety business.

The initial outbreak of the COVID-19 pandemic impacted our business, as well as many others, and 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. With the spread of the Delta variant causing renewed implementations of preventative measures including travel restrictions, closures of non-essential businesses and other quarantine measures, we believe that we could experience a resurgence in demand for our AI-driven thermal imaging solutions, which can be an important safety
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measure organizations and businesses implement as they try to prevent the further spread of COVID-19 and maintain the health and safety of the public. Our business and financial results may, however, still 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, including whether the recent surge in the Delta variant could lead to prolonged, more stringent or entirely new preventative measures.

In China, project completions continued on a steady pace, except as affected by the seasonal closures related to Chinese New Year.

The following table presents our revenue categories as a percentage of total consolidated revenue during the six months ended June 30, 2021.
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
AI-based products and services96 %89 %93 %87 %
Advertising and other%11 %%13 %


CRITICAL ACCOUNTING POLICIES

During the three and six months ended June 30, 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.


RESULTS OF OPERATIONS

The following tables summarize our operating results for the three and six months ended June 30, 2021, and the discussion following the tables explain material changes in the operating results for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020.


(dollars in thousands)Three Months Ended June 30,Change
20212020DollarsPercentage
Revenue$4,016 $2,299 $1,717 75 %
Cost of revenue2,252 1,210 1,042 86 %
Sales and marketing398 486 (88)(18)%
Technology and development1,305 1,477 (172)(12)%
General and administrative2,482 1,898 584 31 %
Depreciation and amortization49 66 (17)(26)%
Interest expense(380)(775)395 (51)%
Other income57 (51)(89)%
Change in FV of warrant liability1,322 (6,260)7,582 (121)%
Other gain (loss)(30)— (30)

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(dollars in thousands)Six Months Ended June 30,Change
20212020DollarsPercentage
Revenue$8,422 $2,730 $5,692 208 %
Cost of revenue5,004 1,231 3,773 306 %
Sales and marketing1,399 902 497 55 %
Technology and development2,855 2,125 730 34 %
General and administrative5,179 4,638 541 12 %
Depreciation and amortization115 156 (41)(26)%
Interest expense(615)