UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 20202022
Commission File Number 001-33720
Remark Holdings, Inc.
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| Delaware | | 33-1135689 | |
| State of Incorporation | | IRS Employer Identification Number | |
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800 SS. 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:
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| Title of each class | | Trading Symbol | | Name of each exchange on which registered | |
| Common Stock, $0.001 par value per share | | MARK | | The NASDAQNasdaq Stock Market LLC | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No ☑
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 and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
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”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☐ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☑ | | Smaller 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 June 30, 2020,2022, the aggregate market value of our voting and non-voting common equity held by non-affiliates was $220.9$43.7 million.
As of March 29, 2021,April 14, 2023, a total of 99,916,94113,633,992 shares of our common stock were outstanding.
TABLE OF CONTENTS
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| PART I | | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| PART II | | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | |
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| PART III | | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| PART IV | | |
| Item 15. | | |
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| Item 16. | Form 10-K Summary | |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The matters discussed in this Annual Report on Form 10-K (this “2020 Form“Form 10-K”) 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. TheseSuch 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 statedsimilarly-stated expectations. Undue relianceYou should not be placedplace undue reliance on these forward-looking statements, which speak only as of the date of this 2020 Form 10-K,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 2020 Form 10-Kreport 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 2020 Form 10-K.
PART I
ITEM 1. BUSINESS.BUSINESS
OVERVIEW
Remark Holdings, Inc. and its subsidiaries (“Remark”, “we”, “us”, or “our”), which include its consolidated variable-interest entities (“VIEs”), are constitute a diversified global technology companybusiness with leading artificial intelligence (“AI”) and data-analytics, as well as a portfolio of digital media properties.
Our innovative artificial intelligence (“AI”) and data analytics solutions continue to gain worldwide awareness and recognition through comparative testing, product demonstrations, media exposure, and word of mouth. We continue to see positive responses and increased acceptance of our software and applications in a growing number of industries. We intend to expand our business in three major regions, Asia-Pacific, North America, and Europe. The Asia-Pacific region has a fast-growth AI market with significant opportunities for our solutions. In North America, primarily in the United States, and in Europe, we see robust demand for AI products and solutions in a growing number of industries, including potential growth opportunities particularly in the workplace, schools, transportation and public safety markets, especially in response tomarkets. Despite such opportunities, the COVID-19 pandemic. The COVID-19 pandemic, as well as economic and geopolitical conditions, particularly in international markets, could adversely affect our business. We continue to pursue large business opportunities where we can quickly deploy our software solutions in the market segments we have identified, in which we may face a number of large, well-known competitors.
Our corporate headquarters and U.S. operations are headquarteredbased in Las Vegas, Nevada, and our China operations are headquartered in Chengdu, China with additionalwe also maintain operations in Beijing, Shanghai,London, England and Hangzhou.Chengdu, China. Our common stock, par value $0.001 per share, is listed on the NASDAQNasdaq Capital Market under the ticker symbol MARK.
On December 21, 2022, we effected a 1-for-10 reverse split of our common stock (the “Reverse Split”). All references made to share or per share amounts in this Form 10-K have been retroactively adjusted to reflect the effects of the Reverse Split.
OUR BUSINESS
DevelopmentCorporate Structure
In 2009,We are a holding company incorporated in Delaware and not a Chinese operating company. As a holding company, we co-foundedconduct most of our operations through our subsidiaries, each of which is wholly owned. We have historically conducted a U.S.-based venture, Sharecare, Inc.significant part of our operations through contractual arrangements between our wholly-foreign-owned enterprise (“Sharecare”WFOE”), and certain variable interest entities (“VIEs”) based in China to buildaddress challenges resulting from laws, policies and practices that may disfavor foreign-owned entities that operate within industries deemed sensitive by the Chinese government. We were the primary beneficiary of the VIEs because the contractual arrangements governing the relationship between the VIEs and our WFOE, which included an exclusive call option agreement, exclusive business cooperation agreement, a web-based platform that simplifiesproxy agreement and an equity pledge agreement, enabled us to (i) exercise effective control over the search for healthVIEs, (ii) receive substantially all of the economic benefits of the VIEs, and wellness information. The other co-founders of Sharecare were Dr. Mehmet Oz, HARPO Productions, Discovery Communications, Jeff Arnold and Sony Pictures Television. As a(iii) have an exclusive call option to purchase, at any time, all or part of the transactions,equity interests in and/or assets of the VIEs to the extent permitted by Chinese laws. Because we received an equity stakewere the primary beneficiary of the VIEs, we consolidated the financial results of the VIEs in Sharecare, which constitutes approximately 4.4 percent of Sharecare’s issued capital stock at December 31, 2020. We also maintain representation on Sharecare’s board of directors.our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”).
In September 2015, we acquired Vegas.com LLC (“Vegas.com” or “VDC”) to give us a deeper reach into the travel and entertainment market in Las Vegas and the surrounding area. After operating Vegas.com for several years, we determined that we would further focus on our AI business and reduce our debt by disposing of Vegas.com. On May 15, 2019, we completed the sale ofWe terminated all of the issuedcontractual arrangements between the WFOE and outstanding membership interests of Vegas.com pursuant to a Membership Interest Purchase Agreement, datedthe VIEs and exercised our rights under the exclusive call option agreements between the WFOE and the VIEs such that, effective as of March 15, 2019, with VDC-MGG Holdings LLC, an affiliate of our lenders, for an aggregate purchase price of $30 million (the “VDC Transaction”). The cash proceedsSeptember 19, 2022, we obtained 100% of the VDC Transaction were used to pay amounts due to our lenders.equity ownership of the entities we formerly consolidated as VIEs and which we now consolidate as wholly-owned subsidiaries.
After spending mostThe following diagram illustrates our corporate structure, including our significant subsidiaries, as of the first quarterdate of 2020 on product developmentthis Form 10-K. The diagram omits certain entities which are immaterial to our results of operations 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.financial condition.
We are subject to certain legal and operational risks associated with having a significant portion of our operations in China. Chinese laws and regulations governing our current business operations, including the enforcement of such laws and regulations, are sometimes vague and uncertain and can change quickly with little advance notice. The Chinese government may intervene in or influence the operations of our China-based subsidiaries at any time and may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our securities. In addition, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors and cause the value of such securities to
significantly decline or become worthless. In recent years, the Chinese government adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to the use of variable interest entities, cybersecurity, data security, export control and anti-monopoly concerns. As of the date of this Form 10-K, we have neither been involved in any investigations on cybersecurity review initiated by any Chinese regulatory authority, nor received any inquiry, notice or sanction. As of the date of this Form 10-K, no relevant laws or regulations in China explicitly require us to seek approval from the China Securities Regulatory Commission (the “CSRC”) for any securities listing. As of the date of this Form 10-K, we have not received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other Chinese governmental authorities relating to securities listings. However, since these statements and regulatory actions are newly published, official guidance and related implementation rules have not all been issued. It is highly uncertain what potential impact such modified or new laws and regulations will have on our ability to conduct our business, accept investments or list or maintain a listing on a U.S. or foreign exchange.
As of the date of this Form 10-K, we are not required to seek permissions from the CSRC, the Cyberspace Administration of China (the “CAC”), or any other entity that is required to approve our operations in China. Nevertheless, Chinese regulatory authorities may in the future promulgate laws, regulations or implement rules that require us or our subsidiaries to obtain permissions from such regulatory authorities to approve our operations or any securities listing.
Holding Foreign Companies Accountable Act
The Holding Foreign Companies Accountable Act (the “HFCA Act”) was enacted on December 18, 2020. The HFCA Act states that if the Securities and Exchange Commission (the “SEC”) determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the Public Company Accounting Oversight Board (the “PCAOB”) for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market in the United States. On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction. The Consolidated Appropriations Act, 2023, which was signed into law on December 29, 2022, amended the HFCA Act to reduce the number of consecutive non-inspection years required to trigger the trading prohibition under the HFCA Act from three years to two years.
On December 16, 2021, the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by Chinese and Hong Kong authorities in those jurisdictions.
On August 26, 2022, the CSRC, the Ministry of Finance of the PRC, and the PCAOB signed a Statement of Protocol, taking the first step toward opening access for the PCAOB to completely inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong.
On December 15, 2022, the PCAOB vacated its 2021 determination that the positions taken by authorities in mainland China and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions. In view of the PCAOB’s decision to vacate its 2021 determination and until such time as the PCAOB issues any new adverse determination, the SEC has stated that there are no issuers at risk of having their securities subject to a trading prohibition under the HFCA Act. Each year, the PCAOB will reassess its determinations on whether it can inspect and investigation completely audit firms in China, and if, in the future, the PCAOB determines it cannot do so, or if Chinese authorities do not allow the PCAOB complete access for inspections and investigations for two consecutive years, companies engaging China-based public accounting firms would be delisted pursuant to the HFCA Act.
Our auditor, Weinberg & Company, an independent registered public accounting firm headquartered in the United States is currently subject to PCAOB inspections and has been inspected by the PCAOB on a regular basis. However, if the PCAOB is unable to inspect the work papers of our accounting firm in the future, such lack of inspection could cause trading in our common stock to be prohibited under the HFCA Act, and as a result, an exchange may determine to delist our common stock. The delisting and the cessation of trading of our common stock, or the threat of our common stock being delisted and prohibited from being traded, may materially and adversely affect the value of our common stock.
Business Model
We currently earn the majority of our revenue from sales of AI-based products and services. Excluding general and administrative expense, the primary costs we incur to earn the revenue described abovebelow include:
•software development costs, including licensing costs for third-party software
•cost of equipment related to customized AI products
•costs associated with marketing our brands
AI Business
Through ourWe generate revenue by using the proprietary data and AI software platform our Remark AI business (currently known in the Asia-Pacific region as KanKan) generates revenue by deliveringwe developed to deliver AI-based softwarecomputer vision products, AI computing devices and software-as-a-service solutions for businesses in many industries. In additionWe continue to the other work that we have ramped up, we continue partneringpartner with top universities on research projects targeting algorithm, artificial neural network and computing architectures which we believe keepswill keep us among the leaders in technology development. Our research team continues to participate in various
The primary focus of our business is promoting and facilitating the safety of our customers and their customers through our Smart Safety Platform (the “SSP”). The SSP, having won numerous industry and government benchmark tests for accuracy and speed, is a leading software solution for using computer vision competitions at which it winsto detect persons, objects and behavior in video feeds. Real-time alerts from the SSP allow operations staff to respond rapidly to prevent any events or ranks nearactivities that can endanger public security or at the top.workplace safety.
We continuedeploy the SSP to market Remark AI’sintegrate with each customer’s IT infrastructure, including, in many cases, cameras already in place at the customer’s location(s). When necessary, we also sell and deploy hardware to create or supplement the customer’s monitoring capabilities. Such hardware includes, among other items, cameras, edge computing devices and/or our Smart Sentry units. The Smart Sentry is a large mobile camera unit with a telescoping mast on which a high-quality camera is mounted. Based upon customer needs, the camera may have either standard vision and/or thermal vision capability. The camera works in conjunction with an edge computing device that is also mounted to the unit. The Smart Sentry is an example of how we incorporate the SSP in modern IT architectural concepts, including edge computing and micro-service architectures. Edge computing, for example, allows the SSP to conduct expensive computing tasks at distributed locations without requiring large data transmission over the internet, thereby dramatically reducing costs while integrating numerous and varied sensors at distributed locations.
We customize and sell our innovative AI-based computer vision products and solutions, including the SSP, to customers in the retail, urban life cycleconstruction, public safety, workplace safety and workplace and food safetypublic sector markets.
Retail Solutions. Utilizing a client’s existing cameras and IoT devices placed throughout the store, Remark AI’s retail solutions swiftly analyze real-time customer shopping behavior, such as time of store entry and shelf-browsing habits, and provide managers with a customer heatmap that reflects traffic patterns. Purchase history is We have 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 capabilitiesdeveloped versions 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.
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 predominantlyapplication in the U.S. market.
Remark AI Thermal Kits. We sell our Remark AI Thermal Kits to customers needing the ability to scan crowdstransportation 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 our AI and data analytics solutions, we maintain a digital media portfolio which, in addition to operating businesses, includes an approximately 4.4 percent ownership in the issued stock of Sharecare, an established health and wellness platform with more than 100 million users. We continue to evaluate opportunities to monetize and maximize the value of this asset for our shareholders. In addition to Data Platform Services revenue from our 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.energy markets.
Competition
We compete for business primarily on the basis of the quality and reliability of our products and services, and primarily in the AI marketplace, which is intensely competitive and rapidly evolving.
Our AI-based products and services represent a significant opportunity for us in the future. We offer AI products and we also build and deploy custom AI solutions. Our AI products compete with companies such as SenseTime, Face++, Google, GoGoVan, WeLab and others, while we compete with companies such as PricewaterhouseCoopers, Hewlett Packard, Baidu and others for business in the AI solutions market space.
Some of the companies we compete against, or may compete against in the future, may have greater brand recognition and may have significantly greater financial, marketing and other resources than we have. As a result of the potentially greater brand recognition and resources, some of our competitors may bring new products and services to market more quickly, and they may be able to adopt more aggressive pricing policies than we could adopt.
Intellectual Property
We rely upon trademark, copyright and trade secret laws in various jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary assets and brands. We own 1233 copyright registrations we have 62and nine AI-related patents, with 27 AI-related patents pending in China and we have several additional patent applications we are preparing to file in China. We also hold various trademarks for our brands, and we have additional applications pending.
Technology
Our technologies include software applications built to run on third-party cloud hosting providers including Amazon Web Services and Alibaba located in North America and Asia. We make substantial use of off-the-shelf available open-source technologies such as Linux, PHP, MySQL, Drupal, mongoDB, Memcache, Apache, Nginx, CouchBase, Hadoop, HBase, ElasticSearch, Lua, Java, Redis, Akka and Wordpress, in addition to commercial platforms such as Microsoft, including Windows Operating Systems, SQL Server, and .NET. Such systems are connected to the Internet via load balancers, firewalls, and routers installed in multiple redundant pairs. We also utilize third-party services to geographically deliver data using major content distribution network providers. We rely heavily on virtualization throughout our technology architecture, which enables the scaling of dozens of digital media properties in an efficient and cost-effective manner.
We use third-party cloud hosting providers to host most of our public-facing websites and applications, as well as many of our back-end business intelligence and financial systems. Each of our significant websites is designed to be fault-tolerant, with collections of application servers, typically configured in a load-balanced state, to provide additional resiliency. The infrastructure is equipped with enterprise-class security solutions to combat events such as large-scale distributed denial of service attacks. Our environment is staffed and equipped with a full-scale monitoring solution.
Governmental Regulation
The services we provide are subject to various laws and regulations. We are subject to a number of U.S. federal and state and foreign laws and regulations that affect companies conducting business on the Internet. These laws and regulations may involve privacy, rights of publicity, data protection, content regulation, intellectual property, competition, protection of minors, consumer protection, taxation or other subjects. Many of these laws and regulations are still evolving and being tested in courts and could be interpreted in ways that could harm our business. In addition, the application and interpretation of these laws and regulations often are uncertain, particularly in the new and rapidly evolving industry in which we operate. There are a number of legislative proposals pending before federal, state, and foreign legislative and regulatory bodies concerning data protection that may affect us. We incorporated the principles of the European Union (“EU”) General Data Protection Regulation (“GDPR”) into our internal data protection policy for our product development and solution implementation. In addition, we voluntarily hired an independent, authorized third party in Germany to conduct a GDPR audit of our privacy practices. The audit found that we are compliant with the GDPR principles.
We post our privacy policy and practices concerning the use and disclosure of any user data on our web properties and our distribution applications. Any failure by us to comply with posted privacy policies, federal and state regulatory requirements or foreign privacy-related laws and regulations could result in proceedings by governmental or regulatory bodies that could potentially harm our businesses, results of operations and financial condition.
Foreign data protection, privacy, and other laws and regulations can be more restrictive than those in the United States. The Chinese government has at times taken measures to restrict digital platforms, publishers or specific content themes from consumption by its citizens. We invest significant efforts into ensuring that our published content in China is consistent with our most current understanding of prevailing Chinese laws, regulations, and policies; and to date our published content in China has been met with successful distribution and no action or inquiry from the Chinese government. However, unforeseen regulatory restrictions or policy changes in China regarding digital content could have a material adverse effect on our business.
The Chinese government has not yet adopted a clear regulatory framework governing the new and rapidly-evolving artificial intelligence industry in which we operate. The Chinese government’s adoption of more stringent laws or enforcement protocols affecting participants in such industries (including, without limitation, restrictions on foreign investment, capital requirements and licensing requirements) could have a material adverse effect on our business.
Corporate Structure
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 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 believe that we are the primary beneficiary of the VIEs because the equity holders of such entities do not have significant equity at risk and because we have been able to direct the operations of the VIEs.
The following diagram illustrates our China holding structure as of the date of this 2020 Form 10-K. The diagram omits certain entities which are immaterial to our results of operations and financial condition. Equity interests depicted in this diagram are 100% owned. The relationships between each of Chengdu Remark Technology Co., Ltd.; Hangzhou Shufeng Technology Co., Ltd.; Remark Data Technology Co., Ltd. and BoNet (Beijing) Technology LLC, on the one hand, and KanKan Technology (Shanghai) Co., Ltd., on the other hand, as illustrated in the following diagram are governed by contractual arrangements, including in each case an Exclusive Call Option Agreement, an Exclusive Business Cooperation Agreement, a Proxy Agreement and an Equity Pledge Agreement, and do not constitute equity ownership.
Transfer of Cash or Assets
Dividend Distributions
As of the date of this Form 10-K, none of our subsidiaries have made any dividends or distributions to the parent company.
We have never declared or paid dividends or distributions on our common equity. We currently intend to retain all available funds and any future consolidated earnings to fund our operations and continue the development and growth of our business; therefore, we do not anticipate paying any cash dividends.
Under Delaware law, a Delaware corporation’s ability to pay cash dividends on its capital stock requires the corporation to have either net profits or positive net assets (total assets less total liabilities) over its capital. If we determine to pay dividends on any of our common stock in the future, as a holding company, we may rely on dividends and other distributions on equity from our subsidiaries for cash requirements, including the funds necessary to pay dividends and other cash contributions to our stockholders.
Our WFOE’s ability to distribute dividends is based upon its distributable earnings. Current Chinese regulations permit our WFOE to pay dividends to its shareholder only out of its registered capital amount, if any, as determined in accordance with Chinese accounting standards and regulations, and then only after meeting the requirement regarding statutory reserve. If our WFOE incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Any limitation on the ability of our WFOE to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business. In addition, any cash dividends or distributions of assets by our WFOE to its stockholder are subject to a Chinese withholding tax of as much as 10%.
The Chinese government also imposes controls on the conversion of Chinese Renminbi (“RMB”) into foreign currencies and the remittance of currencies out of China. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. If we are unable to receive all of the revenues from our operations through our China-based subsidiaries, we may be unable to pay dividends on our common stock.
Employees
We employed 7788 people as of March 29, 2021,April 14, 2023, all of whichwhom are full-time employees.
ADDITIONAL INFORMATION
We were originally incorporated in Delaware in March 2006 as HSW International, Inc., we changed our name to Remark Media, Inc. in December 2011, and as our business continued to evolve, we changed our name to Remark Holdings, Inc. in April 2017.
As soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC, we provide free access through our website (www.remarkholdings.com) to our Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We do not incorporate any information found on our website into the materials we file with, or furnish to, the SEC; therefore, you should not consider any such information a part of any filing we make with the SEC. You may also obtain the reports noted above at the SEC’s website (www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information contained in this 2020 Form 10-K, including our consolidated financial statements and notes thereto, before deciding whether to invest in our common stock. Additional risks and uncertainties that we are unaware of may become important factors that affect us. If any of these risks actually occur, our business, financial condition or operating results may suffer, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risk Factor Summary:
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this summary. These risks include, among others, the following:
Risks Relating to Our Corporate Structure
•We have historically relied on contractual arrangements with the VIEs and their shareholders for a significant portion of our business operations. If the Chinese government determines that such contractual arrangements did not comply with Chinese regulations, or if these regulations change or are interpreted differently in the future, we could be subject to penalties, and our common stock may decline in value or even become worthless.
•Our contractual arrangements with the former VIEs may be subject to scrutiny by China’s tax authorities. Any adjustment of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated net income and the value of your investment.
Risks Relating to Doing Business in China
•Changes in China’s economic, political, social or geopolitical conditions or in U.S.-China relations, as well as possible interventions and influences of any government policies and actions, could have a material adverse effect on our business and operations and the value of our common stock.
•Uncertainties with respect to the Chinese legal system could adversely affect us.
•We may be liable for improper use or appropriation of personal information provided by our customers and any failure to comply with Chinese laws and regulations over data security could result in materially adverse impact on our business, results of operations and the value of our common stock.
•Trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or fully investigate our auditors, and as a result, Nasdaq may determine to delist our securities.
Risks Relating to Our Business and Industry
We•The continuing impacts of COVID-19 are highly unpredictable and could be significant, and may have insufficient authorized capital stock to issue common stock to all of the holders ofan adverse effect on our outstanding stock optionsbusiness and warrants and will need to seek stockholder approval to authorize additional shares of common stock in connection with the exercise of such outstanding securities or any future equity financing transactions.financial results.
•Laws and regulations concerning data privacy are continually evolving. Failure to comply with these laws and regulations could harm our business.
•Our Amendedcontinuous access to publicly-available data and Restated Certificateto data from partners may be restricted, disrupted or terminated, which would restrict our ability to develop new products and services, or to improve existing products and services, which are based upon our AI platform.
•Our AI software and our application software are highly technical and run on very sophisticated third-party hardware platforms. If such software or hardware contains undetected errors, our AI solutions may not perform properly and our business could be adversely affected.
•The successful operation of Incorporation authorizesour AI platform will depend upon the performance and reliability of the Internet infrastructure in China.
•Our outstanding senior secured loan agreements contain certain covenants that restrict our ability to engage in certain transactions and may impair our ability to respond to changing business and economic conditions.
•Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
•We may be subject to intellectual property infringement claims, which may force us to issue upincur substantial legal expenses and, if determined adversely against us, materially disrupt our business.
•We face intense competition from larger, more established companies, and we may not be able to 100,000,000compete effectively, which could reduce demand for our services.
•If we do not effectively manage our growth, our operating performance will suffer and our financial condition could be adversely affected.
Risks Relating to our Company
•We have a history of operating losses and we may not generate sufficient revenue to support our operations.
•We may not have sufficient cash to repay our outstanding senior secured indebtedness.
•Our independent registered public accounting firm’s reports for the fiscal years ended December 31, 2022 and 2021 have raised substantial doubt regarding our ability to continue as a “going concern.”
•We continue to evolve our business strategy and develop new brands, products and services, and our future prospects are difficult to evaluate.
Risks Relating to Our Common Stock
•Our failure to meet the continued listing requirements of the Nasdaq Stock Market could result in a delisting of our common stock.
•Our stock price has fluctuated considerably and is likely to remain volatile, and various factors could negatively affect the market price or market for our common stock.
•Holders of our warrants will have no rights as a common stockholder until they exercise their warrants and acquire our common stock.
•The concentration of our stock ownership may limit individual stockholder ability to influence corporate matters.
•A significant number of additional shares of our common stock may be issued under the terms of existing securities, which 99,916,941 shares were outstanding asissuances would substantially dilute existing stockholders and may depress the market price of March 29, 2021. In addition, asour common stock.
•Provisions in our corporate charter documents and under Delaware law could make an acquisition of March 29, 2021,Remark more difficult, which acquisition may be beneficial to stockholders.
Risks Relating to Our Corporate Structure
We have historically relied on contractual arrangements with the VIEs and their shareholders for a significant portion of our business operations. If the Chinese government determines that such contractual arrangements did not comply with Chinese regulations, or if these regulations change or are interpreted differently in the future, we had outstandingcould be subject to penalties, and our common stock options allowingmay decline in value or even become worthless.
Prior to the termination of our contractual arrangements with the VIEs, we relied on such contractual arrangements with the former VIEs to operate our business in China. The revenues contributed by the former VIEs constituted a majority of our total revenues for the purchasefiscal years ended December 31, 2022 and 2021.
In recent years, the Chinese government adopted a series of as many as approximately 15.3 million sharesregulatory actions and issued statements to regulate business operations in China, including those related to variable interest entities. These recent statements indicate an intent by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers. As of common stock and we had outstanding warrants to purchase 40,000 sharesthe date of common stock. If allthis Form 10-K, there are no relevant laws or regulations in China that prohibit our Company or any of our outstanding stock optionssubsidiaries from listing or offering securities in the United States. However, official guidance and warrants were exercised,related implementation rules have not been issued. Future action taken by the total number of sharesChinese government could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our common stock to significantly depreciate or become worthless. In addition, although we believe that our historical contractual arrangements with the former VIEs complied with applicable Chinese laws and regulations, the Chinese government may determine at any time that such contractual arrangements with the former VIEs did not apply with Chinese regulations, or such regulations may change or be interpreted differently in the future. If the Chinese government determines that our contractual arrangements with the former VIEs did not comply with Chinese regulations or if these regulations change or are interpreted differently in the future, we may be subject to penalties imposed by the Chinese government, and our common stock may decline in value or become worthless.
Our contractual arrangements with the former VIEs may be subject to scrutiny by China’s tax authorities. Any adjustment of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated net income and the value of your investment.
The tax regime in China is rapidly evolving and there is significant uncertainty for Chinese taxpayers as Chinese tax laws may be interpreted in significantly different ways. China’s tax authorities may assert that we would beor the former VIEs or their shareholders are required to issuepay additional taxes on previous or future revenue or income. In particular, under applicable Chinese laws, rules and regulations, arrangements and transactions among related parties, such as the contractual arrangements with the former VIEs, may be subject to audit or challenge by China’s tax authorities. If China’s tax authorities determine that any contractual arrangements were not entered into on an arm’s length basis and therefore constitute a favorable transfer pricing, the China tax liabilities of the relevant subsidiaries, the former VIEs or the shareholders of the former VIEs could be increased, which could increase our overall tax liabilities. In addition, China’s tax authorities may impose interest on late payments. Our net income may be materially reduced if our tax liabilities increase. It is uncertain whether any new China laws, rules or regulations relating to VIE structures will be adopted or, if adopted, what they would greatly exceedprovide.
If we or any of the numberformer VIEs are found to be in violation of any existing or future China laws, rules or regulations, or if we fail to obtain or maintain any of the required permits or approvals, the relevant China regulatory authorities would have broad discretion to take action in dealing with these violations or failures, including revoking the business and operating licenses of the former VIEs, requiring us to discontinue or restrict our operations, restricting our right to collect revenue, blocking one or more of our remaining authorized but unissued shareswebsites, requiring us to restructure our operations or taking other regulatory or enforcement actions against us. The imposition of any of these measures could result in a material adverse effect on our ability to conduct all or any portion of our business operations. In addition, it is unclear what impact Chinese government actions would have on us and on our ability to consolidate the financial results of any of the former VIEs in our consolidated financial statements, if Chinese governmental authorities were to find our former corporate structure and historical contractual arrangements to be in violation of Chinese laws, rules and regulations. If the imposition of any governmental actions causes us to lose our right to direct the activities of any of the former VIEs or otherwise separate from any of these entities, and if we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of the former VIEs in our consolidated financial statements. Any of these events would have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to Doing Business in China
Changes in China’s economic, political, social or geopolitical conditions or in U.S.-China relations, as well as possible interventions and influences of any government policies and actions, could have a material adverse effect on our business and operations and the value of our common stock.
As a result of such potential shortfall in the numberA significant portion of our authorized shares of common stock, we will have insufficient shares of common stock available to issue in connection with the exercise ofoperations are conducted through our outstanding stock options and warrants or any future equity financing transaction we may seek to undertake.China-based subsidiaries. Accordingly, we are currently seeking approval of an increase in the number of our authorized shares of common stock at a special meeting of stockholders to be held on April 6, 2021. However, we cannot assure you that our stockholders will authorize an increase in the number of shares of our common stock. Our failure to have a sufficient number of authorized shares of common stock for issuance upon future conversion of our outstanding stock options and warrants could result in a breach under such securities, which could adversely affect our business, financial condition, results of operations and prospects.prospects may be influenced to a significant degree by political, economic, social conditions and government policies in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position. The COVID-19 pandemic has had a severe and negative impact on the Chinese and global economy. In particular, the preventative measures in China as a result of the Chinese government’s “Zero-COVID” policy have significantly limited the operational capabilities of our China-based subsidiaries, caused a material adverse impact on our business and, though the preventative measures have been eased somewhat, may continue to have an adverse impact on our operations in China.
The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating results.
Furthermore, we and our investors may face uncertainty about future actions by the government of China that could significantly affect the financial performance and operations of our China-based subsidiaries. Chinese laws and regulations, including the enforcement of such laws and regulations, can change quickly with little advance notice. The Chinese government may intervene or influence our operations at any time and may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our securities. As of the date of this Form 10-K, neither Remark nor any of its subsidiaries has received or was denied permission from Chinese authorities to list on U.S. exchanges or conduct U.S. securities offerings. However, there is no guarantee that we will receive or not be denied permission from Chinese authorities to list on U.S. exchanges or conduct U.S. securities offerings in the future. China’s economic, political and social conditions, as well as interventions and influences of any government policies, laws and regulations are uncertain and could have a material adverse effect on our business.
Uncertainties with respect to the Chinese legal system could adversely affect us.
The Chinese legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. Since these laws and regulations are relatively new and the Chinese legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and the enforcement of these laws, regulations and rules involves uncertainties.
In 1979, the Chinese government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the
protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.
Furthermore, the Chinese legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.
In addition, we are subject to risks and uncertainties of the interpretations and applications of Chinese laws and regulations, and any such interpretations and applications could lead to future actions of the Chinese government that are detrimental to us and/or our China-based subsidiaries, which would likely result in material adverse changes in our operations and cause the value of our common stock to potentially depreciate significantly or become worthless.
We may be liable for improper use or appropriation of personal information provided by our customers and any failure to comply with Chinese laws and regulations over data security could result in materially adverse impact on our business, results of operations and the value of our common stock.
Our business involves collecting and retaining certain internal and external data and information including that of our customers and suppliers. The integrity and protection of such information and data are crucial to us and our business. Owners of such data and information expect that we will adequately protect their personal information. We are required by applicable laws to keep strictly confidential the personal information that we collect, and to take adequate security measures to safeguard such information.
The PRC Criminal Law, as amended by its Amendment 7 (effective on February 28, 2009) and Amendment 9 (effective on November 1, 2015), prohibits institutions, companies and their employees from selling or otherwise illegally disclosing a citizen’s personal information obtained in performing duties or providing services or obtaining such information through theft or other illegal ways. On November 7, 2016, the Standing Committee of the PRC National People’s Congress issued the Cyber Security Law of the PRC (the “Cyber Security Law”), which became effective on June 1, 2017. Pursuant to the Cyber Security Law, network operators must not, without users’ consent, collect their personal information, and may only collect users’ personal information necessary to provide their services. Providers are also obliged to provide security maintenance for their products and services and shall comply with provisions regarding the protection of personal information as stipulated under the relevant laws and regulations.
The Civil Code of the PRC (issued by the PRC National People’s Congress on May 28, 2020 and effective from January 1, 2021) provides legal basis for privacy and personal information infringement claims under the Chinese civil laws. Chinese regulators, including the CAC, the Ministry of Industry and Information Technology, and the Ministry of Public Security, have been increasingly focused on regulation in data security and data protection.
On August 20, 2021, the Standing Committee of the 13th National People's Congress of China issued the final version of the Personal Information Protection Law (the “PIPL”), which became effective on November 1, 2021.The PIPL imposes on China-based data processers (such as our China-based subsidiaries) significant obligations with respect to, among other things, obtaining, processing and cross-border transferring personal information.The PIPL may subject a data processor to a penalty of as much as RMB50 million or 5% of the preceding year’s turnover.
The Chinese regulatory requirements regarding cybersecurity are evolving. For instance, various regulatory bodies in China, including the CAC, the Ministry of Public Security and the State Administration for Market Regulation, have enforced data privacy and protection laws and regulations with varying and evolving standards and interpretations.
In November 2021, the CAC and other related authorities released the amended Cybersecurity Review Measures which became effective on February 15, 2022. Under the amended Cybersecurity Review Measures:
•companies who are engaged in data processing are also subject to the regulatory scope;
•the CSRC is included as one of the regulatory authorities for purposes of jointly establishing the state cybersecurity review working mechanism;
•the operators (including both operators of critical information infrastructure and relevant parties who are engaged in data processing) holding more than one million users/users’ (which are to be further specified) individual information and seeking a listing outside China shall file for cybersecurity review with the Cybersecurity Review Office; and
•the risks of core data, material data or large amounts of personal information being stolen, leaked, destroyed, damaged, illegally used or transmitted to overseas parties and the risks of critical information infrastructure, core data, material data or large amounts of personal information being influenced, controlled or used maliciously shall be collectively taken into consideration during the cybersecurity review process.
As a result of the promulgation of the amended Cybersecurity Review Measures, we may become subject to enhanced cybersecurity review. Certain internet platforms in China have been reportedly subject to heightened regulatory scrutiny in relation to cybersecurity matters. As of the date of this Form 10-K, we have neither been subject to heightened regulatory scrutiny with respect to cybersecurity matters nor been informed by any Chinese governmental authority of any requirement that we file for a cybersecurity review. However, if we are deemed to be a critical information infrastructure operator or a company that is engaged in data processing and holds personal information of more than one million users, we could be subject to Chinese cybersecurity review.
As there remains significant uncertainty in the interpretation and enforcement of relevant Chinese cybersecurity laws and regulations, we could be subject to cybersecurity review, and if so, we may not be able to pass such review. In addition, we could become subject to enhanced cybersecurity review or investigations launched by Chinese regulators in the future. Any failure or delay in the completion of the cybersecurity review procedures or any other non-compliance with the related laws and regulations may result in fines or other penalties, including suspension of business, website closure, removal of our app from the relevant app stores, and revocation of prerequisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse effect on our business, financial condition or results of operations. As of the date of this Form 10-K, we have neither been involved in any investigations on cybersecurity review initiated by the CAC or any other Chinese regulatory authority nor have we received any inquiry, notice or sanction in such respect. We believe that we are in compliance with the aforementioned regulations and policies that have been issued by the CAC.
On June 10, 2021, the Standing Committee of the National People’s Congress of China (the “SCNPC”) promulgated the PRC Data Security Law, which took effect on September 1, 2021. The PRC Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data activities, and introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, illegally acquired or used. The PRC Data Security Law also provides for a national security review procedure for data activities that may affect national security and imposes export restrictions on certain data an information.
As of the date of this Form 10-K, we do not expect that the current Chinese laws on cybersecurity or data security or the PIPL would have a material adverse impact on our business operations. However, as uncertainties remain regarding the interpretation and implementation of these laws and regulations, we cannot assure you that we will comply with such regulations in all respects and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities. We may also become subject to fines and/or other sanctions which may have material adverse effect on our business, operations and financial condition.
Trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or fully investigate our auditors, and as a result, Nasdaq may determine to delist our securities.
The HFCA Act was enacted on December 18, 2020. The HFCA Act states if the SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market in the United States. On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction. The Consolidated Appropriations Act, 2023, which was signed into law on December 29, 2022, amended the HFCA Act to reduce the number of consecutive non-inspection years required to trigger the trading prohibition under the HFCA Act from three years to two years.
On December 16, 2021, the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by Chinese and Hong Kong authorities in those jurisdictions.
On August 26, 2022, the CSRC, the Ministry of Finance of the PRC, and the PCAOB signed a Statement of Protocol, taking the first step toward opening access for the PCAOB to completely inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong.
On December 15, 2022, the PCAOB vacated its 2021 determination that the positions taken by authorities in mainland China and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions. In view of the PCAOB’s decision to vacate its 2021 determination and until such time as the PCAOB issues any new adverse determination, the SEC has stated that there are no issuers at risk of having their securities subject to a trading prohibition under the HFCA Act. Each year, the PCAOB will reassess its determinations on whether it can inspect and investigation completely audit firms in China, and if, in the future, the PCAOB determines it cannot do so, or if Chinese authorities do not allow the PCAOB complete access for inspections and investigations for two consecutive years, companies engaging China-based public accounting firms would be delisted pursuant to the HFCA Act.
Our auditor, Weinberg & Company, an independent registered public accounting firm headquartered in the United States, is currently subject to PCAOB inspections and has been inspected by the PCAOB on a regular basis. However, if the PCAOB is unable to inspect the work papers of our accounting firm in the future, such lack of inspection could cause trading in our common stock to be prohibited under the HFCA Act, and as a result, an exchange may determine to delist our common stock. The delisting and the cessation of trading of our common stock, or the threat of our common stock being delisted and prohibited from being traded, may materially and adversely affect the value of our common stock.
These recent developments may result in prohibitions on the trading of our common stock on the Nasdaq Capital Market, if our auditors fail to meet the PCAOB inspection requirement in time.
Risks Relating to Our Business and Industry
The continuing impacts of COVID-19 are highly unpredictable and could be significant, and may have an adverse effect on our business and financial results.
The global outbreak of COVID-19 has impacted our business and could continue to have a significant impact on our business. The impact of COVID-19 on our business and future financial results could include, but may not be limited to:
•lack of revenue growth or decreases in revenue due to a lack of, or at least a decline in, customer demand and (or) deterioration in the credit quality of our customers;
•a significant increase in our need for external financing to maintain operations as a result of decreased revenue;
•significant decline in the debt and equity markets, thus impacting our ability to conduct financings on terms acceptable to us; and
•the rapid and broad-based shift to a remote working environment creates inherent productivity, connectivity, and oversight challenges. Preventative measures implemented by governmental authorities in China, such as travel restrictions, shelter-in-place orders and business closures, could significantly impact the ability of our employees and vendors to work productively. Governmental restrictions have been globally inconsistent and it is not clear when a return to worksite locations or travel will be permitted or what restrictions will be in place in those environments. In addition, the changed environment under which we are operating could have an impact on our internal controls over financial reporting as well as our ability to meet a number of our compliance requirements in a timely or quality manner.
The extent of theany ongoing impact of the pandemic on our business and financial results will depend largely on future developments, including the duration and severity of the outbreak,any outbreaks related to new variants of COVID-19, the length of the travel restrictions and business closures imposed 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 arecan be highly uncertain and cannot be predicted. TheThough improving somewhat, the situation is changing rapidly,continues to evolve and additional impacts may arise that we are not aware of currently.
The artificial intelligence market is new and unproven, and it may decline or experience limited growth, which would adversely affect our ability to fully realize the potential of our AI platform.
The artificial intelligence market is relatively new and unproven and is subject to a number of risks and uncertainties. We believe that our future success will depend in large part on the growth and acceptance of this market. The utilization of our platform by customers is still relatively new, and customers may not recognize the need for, or benefits of, our platform, which may prompt them to decide to adopt alternative products and services to satisfy their cognitive computing search and analytics requirements. Our ability to expand the market that our platform addresses depends upon a number of factors, including the cost, performance and perceived value of our platform. Market opportunity estimates are subject to significant uncertainty and are based on assumptions and estimates, including our internal analysis and industry experience. Assessing the market for our AI-based products in each of the vertical markets we compete in, or plan to compete in, is particularly difficult due to a number of factors, including limited available information and rapid evolution of the market. As a result, we may experience significant reduction in demand for our products and services due to lack of customer acceptance, technological challenges, competing products and services, decreases in spending by current and prospective customers, weakening economic conditions and other causes. If our market does not experience significant growth, or if demand for our AI-based products decreases, then our business, results of operations and financial condition will be adversely affected.
Laws and regulations concerning data privacy are continually evolving. Failure to comply with these laws and regulations could harm our business.
PortionsOur business involves collecting and retaining certain internal and external data and information including that of our business, primarilycustomers and suppliers and third parties. The integrity and protection of such information and data are crucial to us and our AI solutions,business. Owners of such data and information expect that we will adequately protect their personal information. We are subject to certainrequired by applicable privacy and data protection laws in the U.SU.S. and internationally. internationally to keep strictly confidential the personal information that we collect, and to take adequate security measures to safeguard such information.
Our failure to comply with existing privacy or data protection laws and regulations could increase our costs, force us to change or limit the features of our AI softwaresolutions or result in proceedings or litigation against us by governmental authorities or others, any or all of which could result in significant fines or judgments against us, result in damage to our reputation, and result in negative effects on our financial condition and results of operations. Even if concerns raised by regulators, the media, or consumers about our privacy and data protection or consumer protection practices are unfounded, we could suffer damage to our reputation that causes significant negative effects on our financial condition and results of operations.
Privacy and data protection laws are rapidly changing and likely will continue to do so for the foreseeable future, which could have an impact on how we develop and customize our AI products and software. InThe growth and development of AI may prompt calls for more stringent consumer privacy protection laws that may impose additional burdens on companies such as ours. Any such changes would require us to devote legal and other resources to address such regulation.
For example, in the U.S., the California Consumer Privacy Act ("CCPA") became effective on January 1, 2020 and applies to processing of personal information of California residents. Other states, including Nevada, have enacted or are considering similar privacy or data protection laws that may apply to us. The U.S. government, including the Federal Trade Commission and the Department of Commerce, also continue to review the need for greater or different regulation over the collection of personal information and information about consumer behavior on the Internet and on mobile devices, and the U.S. Congress is considering a number of legislative proposals to regulate in this area. Various government and consumer agencies worldwide have also called for new regulation and changes in industry practices. For example, the GDPR became effective on May 25, 2018. GDPR would apply to us should we expand our AI business into member countries of the EU. Violations of the GDPR may result in significant penalties, and countries in the EU are still enacting national laws that correspond to certain portions of the GDPR.
The growth and development of AI may prompt calls for more stringent consumer privacy protection laws that may impose additional burdens on companies such as ours. Any such changes would require us to devote legal and other resources to address such regulation.
Our continuous access to publicly-available data and to data from partners may be restricted, disrupted or terminated, which would restrict our ability to develop new products and services, or to improve existing products and services, which are based upon our AI platform.
The success of our AI-based solutions depends substantially on our ability to continuously ingest and process large amounts of data available in the public domain and provided by our partners, and any interruption to our free access to such
publicly-available data or to the data we obtain from our partners will restrict our ability to develop new products and services, or to improve existing products and services. While we have not encountered any significant disruption of such access to date, there is no guarantee that this trend will continue without costs. Public data sources may change their policies to restrict access or implement procedures to make it more difficult or costly for us to maintain access, and partners could decide to terminate our existing agreements with them. If we no longer have free access to public data, or access to data from our partners, our ability to maintain or improve existing products, or to develop new AI-based solutions may be severely limited. Furthermore, we may be forced to pay significant fees to public data sources or to partners to maintain access, which would adversely affect our financial condition and results of operations.
Our AI software and our application software are highly technical and run on very sophisticated third-party hardware platforms. If such software or hardware contains undetected errors, our AI solutions may not perform properly and our business could be adversely affected.
Our AI-based solutions and internal systems rely on software, including software developed or maintained internally and(or)or by third parties, that is highly technical and complex. In addition, our AI-based solutions and internal systems depend on the ability of such software to store, retrieve, process, and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors, bugs, or vulnerabilities. Some errors may only be discovered after the AI-based solution or application software has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for our customers, delay product introductions or enhancements, result in measurement or billing errors, or compromise our ability to protect our customers’ data and(or)or our intellectual property. Any errors, bugs, or defects discovered in the software on which we rely could result in damage to our reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect our business and financial results.
The successful operation of our AI platform will depend upon the performance and reliability of the Internet infrastructure in China.
The successful operation of KanKan will depend on the performance and reliability of the Internet infrastructure in China. Almost all access to the Internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology of China. In addition, the national networks in China are connected to the Internet through state-owned international gateways, which are the only channels through which a domestic user can connect to the Internet outside of China. We may not have access to alternative networks in the event of disruptions, failures or other problems with China’s Internet infrastructure. In addition, the Internet infrastructure in China may not support the demands associated with continued growth in Internet usage.
The failure of telecommunications network operators to provide us with the requisite bandwidth could also interfere with the speed and availability of KanKan. We have no control over the costs of the services provided by the national telecommunications operators. If the prices that we pay for telecommunications and Internet services rise significantly, our gross margins could be adversely affected. In addition, if Internet access fees or other charges to Internet users increase, our user traffic may decrease, which in turn may cause a decrease in our revenues.
Delays in collecting amounts receivable arising from our KanKan business in China could negatively impact our results of operations and cash flows.
Generally, Chinese entities tend to pay their vendors on longer timelines than the timelines typically observed in U.S. commerce, while contracts in China can lack the specificity regarding timing of collection that current accounting rules in the U.S. require to record revenue from contracts with customers. The combination of longer collection times and lack of contract specificity regarding timing of collection could result in higher amounts of bad debt expense, less revenue recorded in any particular period and mismatches between the timing of our cash needs and the timing of our cash inflows that could negatively affect our reported results of operations and harm relationships with our vendors, which in turn could harm our business.
If the Chinese government deems that the contractual arrangements in relation to our variable interest entities (“VIEs”) do not comply with its restrictions on foreign investment, or if Chinese regulations or the interpretation of existing regulations changes in the future, we could be subject to penalties or be forced to relinquish our interests in our China operations.
Various regulations in China restrict or prohibit wholly foreign-owned enterprises from operating in specified industries such as Internet information, financial services, Internet access and certain other industries. To comply with Chinese regulatory requirements, we conduct certain of our operations in China through contractual arrangements with our VIEs, which are incorporated in China and owned by members of our management team. These contractual arrangements are intended to give us effective control over each of the VIEs and enable us to receive substantially all of the economic benefits arising from the VIEs as well as consolidate the financial results of the VIEs in our results of operations. We expect that an increased amount of our revenue will be generated through our VIEs. Although the VIE structure we have adopted is consistent with longstanding industry practice, and has been adopted by comparable companies in China, there are substantial uncertainties regarding the interpretation and application of Chinese laws and regulations, and there can be no assurance that the Chinese government would agree that these contractual arrangements comply with China’s licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. Chinese laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.
If the VIE structure is deemed by Chinese regulators having competent authority to be illegal, either in whole or in part, we may lose control of our VIEs and have to modify such structure to comply with regulatory requirements. However, there can be no assurance that we could achieve this without material disruption to our business. Further, if the VIE structure is found to be in violation of any existing or future Chinese laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations. Furthermore, new Chinese laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our contractual arrangements with our VIEs. Occurrence of any of these events could materially and adversely affect our business, financial condition and results of operations.
Our contractual arrangements may not be as effective in providing control over the VIEs as direct ownership.
Because we are restricted or prohibited by the Chinese government from owning certain Internet operations in China, we are dependent on our VIEs, in which we have no direct ownership interest, to provide our AI-based products and services through contractual arrangements among the parties and to hold some of our assets. These contractual arrangements may not be as effective in providing control over our operations as direct ownership of these businesses. For example, if we had direct ownership of our VIEs, we would be able to exercise our rights as a shareholder to effect changes in their boards of directors, which in turn could effect changes at the management level. Due to our VIE structure, we have to rely on contractual rights to effect control and management of our VIEs, which exposes us to the risk of potential breach of contract by the VIEs or their shareholders. In addition, as each of our VIEs is jointly owned by its shareholders, it may be difficult for us to change our corporate structure if such shareholders refuse to cooperate with us. In addition, some of our subsidiaries and VIEs could fail to take actions required for our business. Furthermore, if the shareholders of any of our VIEs were involved in proceedings that had an adverse impact on their shareholder interests in such VIE or on our ability to enforce relevant contracts related to the VIE structure, our business would be adversely affected.
Any failure by our VIEs or their shareholders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition and results of operations.
If our VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce the arrangements. We have also entered into equity pledgeoutstanding senior secured loan agreements with respect to each VIE to secure certain obligations of such variable interest entity or its shareholders to us under the contractual arrangements. However, the enforcement of these agreements through arbitration or judicial agencies may be costly and time-consuming and will be subject to uncertainties in China’s legal system. Moreover, our remedies under the equity pledge agreements are primarily intended to help us collect debts owed to us by the VIEs or the VIEs’ shareholders under the contractual arrangements and may not help us in acquiring the assets or equity of the VIEs.
The contractual arrangements with our VIEs may be subject to scrutiny by China’s tax authorities. Any adjustment of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated net income and the value of your investment.
The tax regime in China is rapidly evolving and there is significant uncertainty for Chinese taxpayers as Chinese tax laws may be interpreted in significantly different ways. China’s tax authorities may assert that we or the VIEs or their shareholders are required to pay additional taxes on previous or future revenue or income. In particular, under applicable Chinese laws, rules and regulations, arrangements and transactions among related parties, such as the contractual arrangements with our VIEs, may be subject to audit or challenge by China’s tax authorities. If China’s tax authorities determine that any contractual arrangements were not entered into on an arm's length basis and therefore constitute a favorable transfer pricing, the China tax liabilities of the relevant subsidiaries, VIEs or VIE shareholders could be increased, which could increase our overall tax liabilities. In addition, China’s tax authorities may impose interest on late payments. Our net income may be materially reduced if our tax liabilities increase. It is uncertain whether any new China laws, rules or regulations relating to VIE structures will be adopted or, if adopted, what they would provide.
If we or any of our VIEs are found to be in violation of any existing or future China laws, rules or regulations, or if we fail to obtain or maintain any of the required permits or approvals, the relevant China regulatory authorities would have broad discretion to take action in dealing with these violations or failures, including revoking the business and operating licenses of our China subsidiaries or the VIEs, requiring us to discontinue or restrict our operations, restricting our right to collect revenue, blocking one or more of our websites, requiring us to restructure our operations or taking other regulatory or enforcement actions against us. The imposition of any of these measures could result in a material adverse effect on our ability to conduct all or any portion of our business operations. In addition, it is unclear what impact Chinese government actions would have on us and on our ability to consolidate the financial results of any of our VIEs in our consolidated financial statements, if China’s governmental authorities were to find our legal structure and contractual arrangements to be in violation of China laws, rules and regulations. If the imposition of any governmental actions causes us to lose our right to direct the activities of any of our material VIEs or otherwise separate from any of these entities, and if we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIEs in our consolidated financial statements. Any of these events would have a material adverse effect on our business, financial condition and results of operations.
The shareholders, directors and executive officers of the VIEs may have potential conflicts of interest with us.
Our VIEs are owned by members of our management team. In addition, these individuals are also directors and officers of the VIEs. Chinese laws provide that a director and an executive officer owe a fiduciary duty to the company he or she directs or manages. The directors and executive officers of the VIEs must therefore act in good faith and in the best interests of the VIEs, and must not use their respective positions for personal gain. These laws, however, do not require them to consider the best interests of Remark when making decisions as a director or member of the management of the VIEs. Conflicts may arise between these individuals’ fiduciary duties as directors and officers of the VIEs and Remark.
Conflicts of interest may also arise due to the individuals’ roles as shareholders of the VIEs and their duties as our employees. The shareholders of the VIEs may breach, or cause the VIEs to breach, the VIE contracts. As a result, we might have to rely on legal or arbitral proceedings to enforce our contractual rights. Any failure by our VIEs or their shareholders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition and results of operations.
The Note (as defined below) containscontain certain covenants that restrict our ability to engage in certain transactions and may impair our ability to respond to changing business and economic conditions.
On February 10,December 3, 2021, we entered into a senior secured promissory noteloan agreements (the “Note”“Original Mudrick Loan Agreements”) with certain of our subsidiaries as guarantors (the “Guarantors”) and Jefferson Remark Funding LLC (the “Lender”certain institutional lenders affiliated with Mudrick Capital Management, LP (collectively, “Mudrick”), pursuant to which the LenderMudrick extended credit to us consisting of a one-year term loanloans in the principal amount of $5.0 million.$30.0 million (the “Original Mudrick Loans”). On March 14, 2023, we entered into a Note Purchase Agreement with Mudrick (the “New Mudrick Loan Agreement”) pursuant to which all of the Original Mudrick Loans were cancelled in exchange for new notes payable to Mudrick (the “New Mudrick Notes”). The Note requiresNew Mudrick Notes require us to satisfy various covenants, including using the proceeds from borrowings under the Note for general corporate purposes in a manner consistent with the identified use of proceeds previously disclosed by us to the Lender. The Note also contains restrictions on our abilitiesability to engage in certain transactions without theMudrick’s consent, of the Lenders, and may limit our ability to respond to changing business and economic conditions. The restrictions include, among other things, limitations on our ability and the ability of our subsidiaries to:
•change its name or corporate form or jurisdiction of organization;
•merge with another entity (other than an affiliate of Lender);
•Mudrick),consolidate, or sell or dispose of any material portion of our assets;
•sell, lease, license, convey, assign (by operation of law or otherwise), exchange or otherwise voluntarily or involuntarily transferor dispose of any interest in any of its assets (other than upon receipt of fair consideration for obsolete assets, trade-ins and disposition, sales or licenses in the ordinary course of business) or any portion thereof or encumber, or hypothecate, or create, incur or permit to exist any pledge, mortgage, lien, security interest, charge, encumbrance or adverse claim upon or other interest in or with respect to any of its assets (other than permitted liens); and
•directly or indirectly enter into or permit to exist any transaction with any affiliateof our affiliates (other than a wholly-owned subsidiary) of us..
Our products and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.
Our products and internal systems rely on software, including software developed or maintained internally and/or by third parties, that is highly technical and complex. In addition, our products and internal systems depend on the ability of such software to store, retrieve, process, and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors, bugs, or vulnerabilities. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for users and marketers who use our products, delay product introductions or enhancements, result in measurement or billing errors, or compromise our ability to protect the data of our users and/or our intellectual property. Any errors, bugs, or defects discovered in the software on which we rely could result in damage to our reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect our business and financial results.
We may be subject to liability in China with respect to Remark Entertainment for content that is alleged to be socially destabilizing, obscene, defamatory, libelous or otherwise unlawful.
Under the laws of the People’s Republic of China, we will be required to monitor our websites and the websites hosted on our servers and mobile interfaces for items or content deemed to be socially destabilizing, obscene, superstitious or defamatory, as well as items, content or services that are illegal to sell online or otherwise in other jurisdictions in which we operate, and promptly take appropriate action with respect to such items, content or services. We may also be subject to potential liability in China for any unlawful actions of our customers or users of our websites or mobile interfaces or for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content that may result in liability to us, and if we are found to be liable, we may be subject to fines, have our relevant business operation licenses revoked, or be prevented from operating our websites or mobile interfaces in China.
Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
We regard our copyrights, service marks, trademarks, trade secrets and other intellectual property as critical to our success. Unauthorized use of our intellectual property by third parties may adversely affect our business and reputation. We rely on trademark and copyright law, trade secret protection and confidentiality agreements with our employees, customers, business partners and others to protect our intellectual property rights. Despite our precautions, it is possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet related industries are uncertain and still evolving. In particular, the laws of the People’s Republic of China are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Future litigation could result in substantial costs and diversion of resources.
We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us, materially disrupt our business.
We cannot be certain that our brands and services will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We cannot provide assurance that we will avoid the need to defend against allegations of infringement of third-party intellectual property rights, regardless of their merit. Intellectual property litigation is very expensive, and becoming involved in such litigation could consume a substantial portion of our managerial and financial resources, regardless of whether we win. Substantially greater resources may allow some of our competitors to sustain the cost of complex intellectual property litigation more effectively than us; we may not be able to afford the cost of such litigation.
Should we suffer an adverse outcome from intellectual property litigation, we may incur significant liabilities, we may be required to license disputed rights from third parties, or we may have to cease using the subject technology. If we are found to infringe upon third-party intellectual property rights, we cannot provide assurance that we would be able to obtain licenses to
such intellectual property on commercially reasonable terms, if at all, or that we could develop or obtain alternative technology. If we fail to obtain such licenses at a reasonable cost, such failure may materially disrupt the conduct of our business, and could consume substantial resources and create significant uncertainties. Any legal action against us or our collaborators could lead to:
•payment of actual damages, royalties, lost profits, potentially treble damages and attorneys’ fees if we are found to have willfully infringed a third party’s patent rights;
•injunctive or other equitable relief that may effectively block our ability to further develop, commercialize and sell our products;
•us or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms, if at all; or
•significant cost and expense, as well as distraction of our management from our business.
The negative outcomes discussed above could adversely affect our ability to conduct business, financial condition, results of operations and cash flows.
We face intense competition from larger, more established companies, and we may not be able to compete effectively, which could reduce demand for our services.
The market for the services we offer is increasingly and intensely competitive. Nearly all our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Our competitors may secure more favorable revenue arrangements with advertisers, devote greater resources to marketing and promotional campaigns, adopt more aggressive growth strategies and devote substantially more resources to website and systems development than we do. In addition, the Internet media and advertising industries continue to experience consolidation, including the acquisitions of companies offering travel and finance-related content and services and paid search services. Industry consolidation has resulted in larger, more established and well-financed competitors with a
greater focus. If these industry trends continue, or if we are unable to compete in the Internet media and paid search markets, our financial results may suffer.
Additionally, larger companies may implement policies and/or technologies into their search engines or software that make it less likely that consumers can reach our websites and less likely that consumers will click-through on sponsored listings from our advertisers. The implementation of such technologies could result in a decrease in our revenues. If we are unable to successfully compete against current and future competitors, our operating results will be adversely affected.
If we do not effectively manage our growth, our operating performance will suffer and our financial condition could be adversely affected.
Substantial future growth will be required for us to realize our business objectives. To the extent we are capable of achieving this growth, it will place significant demands on our managerial, operational and financial resources. Additionally, this growth will require us to make significant capital expenditures, hire, train and manage a larger work force, and allocate valuable management resources. We must manage any such growth through appropriate systems and controls in each of these areas. If we do not manage the growth of our business effectively, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
In addition, as our business grows, our technological and network infrastructure must keep in-line with our needs. Future demand is difficult to forecast and we may not be able to adequately handle large increases unless we spend substantial amounts to augment our ability to handle increased traffic. Additionally, the implementation of increased network capacity contains some execution risks and may lead to ineffectiveness or inefficiency. This could lead to a diminished experience for our consumers and advertisers and damage our reputation and relationship with them, leading to lower marketability and negative effects on our operating results. Moreover, the pace of innovative change in network technology is fast and if we do not keep up, we may lag behind competitors. The costs of upgrading and improving technology could be substantial and negatively affect our business, financial condition, results of operations and cash flows.
Risks Relating to our Company
We have a history of operating losses and we may not generate sufficient revenue to support our operations.
During the year ended December 31, 2020,2022, and in each fiscal year since our inception, we have incurred net losses and generated negative cash flow from operations, resulting in an accumulated deficit of $360.5$(388.5) million.
We cannot provide assurance that revenue generated from our businesses will be sufficient to sustain our operations in the long term. We have implemented measures to reduce operating costs, and we continuously evaluate other opportunities to reduce costs further. Additionally, we are working with our advisors to evaluate strategic alternatives, including the potential sale of certain non-core assets, investment assets and operating businesses. We may also need to obtain additional capital through equity financing or debt financing. Should we fail to successfully implement our plans described herein, such failure would have a material adverse effect on our business, including the possible cessation of operations.
Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (including developments(in particular, as a result of the COVID-19 pandemic, global supply chain disruptions, inflation and volatility arising from COVID-19)other cost increases, and the geopolitical conflict in Ukraine) will play primary roles in determining whether we can successfully obtain additional capital. We cannot be certain that we will be successful at raising capital, whether in an equity financing, debt financing, or by divesting of certain assets or businesses, on commercially reasonable terms, if at all. In addition, if we obtain capital by issuing equity, such transaction(s) may dilute existing stockholders.
We may not have sufficient cash to repay our outstanding senior secured indebtedness.
As of April 14, 2023, $16.2 million of aggregate principal remained outstanding under the New Mudrick Loans, which will be due and payable in full on October 31, 2023. Our available cash and other liquid assets are currently not sufficient to pay such obligations in full. If we do not pay the New Mudrick Notes in full on the scheduled maturity date, Mudrick will have available to them all rights under the New Mudrick Loan Agreements and applicable law, which include, without limitation, foreclosing on the collateral securing the New Mudrick Notes. Mudrick’s exercise of any such rights could have a material adverse effect on our financial condition.
Our independent registered public accounting firm’s reports for the fiscal years ended December 31, 20202022 and 20192021 have raised substantial doubt regarding our ability to continue as a “going concern.”
Our independent registered public accounting firm indicated in its report on our audited consolidated financial statements as of and for the years ended December 31, 20202022 and 20192021 that there is substantial doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern.
Therefore, you should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation. The presence of the going concern note to our financial statements may have an adverse impact on the relationships we are developing and plan to develop with third parties as we continue the commercialization of our products and could make it difficult for us to raise additional financing, all of which could have a material adverse impact on our business and prospects and result in a significant or complete loss of your investment.
Expanding our international operations involves additional risks, and our exposure to such risks increases as our business continues to expand outside of the United States.
We operate outside of the United States in China. China has different economic conditions, languages, currency, consumer expectations, levels of consumer acceptance and use of the Internet for commerce, legislation, regulatory environments (including labor laws and customs), tax laws and levels of political stability. We are subject to associated risks typical of international businesses, including, but not limited to, the following:
•Local economic or political instability;
•Threatened or actual acts of terrorism;
•Compliance with additional laws applicable to companies operating internationally as well as local laws and regulations, including the Foreign Corrupt Practices Act, data privacy requirements, labor and employment law, laws regarding advertisements and promotions and anti-competition regulations;
•Diminished ability to legally enforce contractual rights;
•Increased risk and limits on enforceability of intellectual property rights;
•Restrictions on, or adverse consequences related to, the withdrawal of non-U.S. investment and earnings;
•Restrictions on repatriation of cash as well as restrictions on investments in operations;
•Financial risk arising from transactions in multiple currencies as well as foreign currency exchange restrictions;
•Difficulties in managing staff and operations due to distance, time zones, language and cultural differences; and
•Uncertainty regarding liability for services, content and intellectual property rights, including uncertainty as a result of local laws and lack of precedent.
Operating our business in China exposes us to particular risks and uncertainties relating China’s laws and regulations, some of which restrict foreign investment in businesses including Internet content providers, mobile communication and related businesses. In addition, compliance with legal, regulatory or tax requirements in multiple jurisdictions places demands on our time and resources, and we may nonetheless experience unforeseen and potentially adverse legal, regulatory or tax consequences. In China, legal and other regulatory requirements may prohibit or limit participation by foreign businesses, such as by making foreign ownership or management of Internet businesses illegal or difficult, or may make direct participation in those markets uneconomic, which could make our entry into and expansion in those markets difficult or impossible, require that we work with a local partner or result in higher operating costs. Although we have established effective control of our Chinese business through a series of contractual arrangements, future developments in the interpretation or enforcement of Chinese laws and regulations or a dispute relating to these contractual arrangements could restrict our ability to operate or restructure our business or to engage in strategic transactions. The success of our business in China, and of any future investments in China, is subject to risks and uncertainties regarding the application, development and interpretation of China’s laws and regulations. If we cannot effectively manage our China operations, our business, results of operations and financial condition could be adversely affected.
Furthermore, when we accumulate large amounts of cash in China, which we will consider indefinitely reinvested in our China operations, the repatriation of such funds for use in the United States, including for corporate purposes such as acquisitions, stock repurchases, dividends or debt refinancing, may result in additional U.S. income tax expense and higher cost for such capital.
We continue to evolve our business strategy and develop new brands, products and services, and our future prospects are difficult to evaluate.
We are in varying stages of development with regard to our business, including our artificial intelligence business driven by our AI platform, so our prospects must be considered in light of the many risks, uncertainties, expenses, delays, and difficulties frequently encountered by companies in the early stages of development of business models and products. Some of such risks and difficulties include our ability to, among other things:
•manage and implement new business strategies;
•successfully commercialize and monetize our assets;
•continue to raise additional working capital;
•manage operating expenses;
•establish and take advantage of strategic relationships;
•successfully avoid diversion of management’s attention or of other resources from our existing business
•successfully avoid impairment of goodwill or other intangible assets such as trademarks or other intellectual property arising from acquisitions;
•prevent, or successfully temper, adverse market reaction to acquisitions;
•manage and adapt to rapidly changing and expanding operations;
•respond effectively to competitive developments; and
•attract, retain and motivate qualified personnel.
Because of the early stage of development of certain of our business operations, we cannot be certain that our business strategy will be successful or that it will successfully address the risks described or alluded to above. Any failure by us to successfully implement our new business plans could have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, growth into new areas may require changes to our cost structure, modifications to our infrastructure and exposure to new regulatory, legal and competitive risks.
If we fail to manage our growth, we may need to improve our operational, financial and management systems and processes which may require significant capital expenditures and allocation of valuable management and employee resources. As we continue to grow, we must effectively integrate, develop and motivate new employees, including employees in international markets, while maintaining the beneficial aspects of our company culture. If we do not manage the growth of our business and operations effectively, the quality of our platform and efficiency of our operations could suffer, which could harm our brand, results of operations and business.
We cannot assure you that these investments will be successful or that such endeavors will result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible or that we will achieve these benefits within a reasonable period of time.
Risks Relating to Our investment in Sharecare’s equity securities is currently illiquid.Common Stock
Our investmentfailure to meet the continued listing requirements of the Nasdaq Stock Market could result in Sharecare’s equity securities is illiquid. Sharecare is unlikely to pay current dividends on its equity securities, anda delisting of our ability to realize a return on our investment, and recover our investment, will be dependent on Sharecare’s continued success. There is currently no public market for Sharecare’s securities, which are subject to restrictions on resale that might prevent us from selling such securities during periods in which it would be advantageous to do so. Additionally, our equity position in Sharecare may be diluted if Sharecare issues additional equity, options, or warrants.common stock.
On February 25, 2022, we received written notice from Nasdaq’s Listing Qualifications Department notifying us that, for a period of 30 consecutive business days, the bid price of our common stock closed below the minimum of $1.00 per share
required for continued listing on the Nasdaq Capital Market pursuant to the Bid Price Rule. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had 180 calendar days, or until August 24, 2022, to regain compliance with the Bid Price Rule.
Risks RelatingOn August 30, 2022, we received a staff determination letter from Nasdaq stating that we did not regain compliance with the Bid Price Rule and we were not eligible for a second 180-day grace period because we did not comply with the minimum $5,000,000 Stockholders’ Equity initial listing requirement for the Nasdaq Capital Market. We appealed Nasdaq’s delisting determination to a hearings panel (the “Panel”), which heard our presentation at a hearing held on October 6, 2022.
On October 17, 2022, we received a written decision from the Panel granting our request for continued listing on Nasdaq, subject to the conditions that, on January 11, 2023, we will have demonstrated compliance with the Bid Price Rule by evidencing a closing price of $1.00 or more per share for a minimum of 10 consecutive trading sessions, and that we provide prompt notification of any significant events that occur during the period ending on January 11, 2023 that may affect our compliance with Nasdaq rules.
On January 11, 2023, we received a written notification from Nasdaq confirming that we have regained compliance with the Bid Price Rule and accordingly, the Panel has determined to continue the listing of our common stock on Nasdaq.
Even though we received a favorable decision from the Panel and have regained compliance with the Bid Price Rule, there can be no assurance that we will be able to continue to satisfy our continued listing requirements of the Nasdaq Capital Market going forward. Our Common Stockfailure to meet the continued listing requirements in the future could result in a delisting of our common stock. A delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, customers and employees and potential loss of business development opportunities. A delisting from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly impact the ability of investors to trade our securities and would negatively impact the value and liquidity of our common stock.
Our stock price has fluctuated considerably and is likely to remain volatile, and various factors could negatively affect the market price or market for our common stock.
The trading price of our common stock has been and may continue to be volatile. From January 1, 2019,2020, through March 29, 2021,April 14, 2023, the high and low sales prices for our common stock were $4.72$67.00 and $0.25, respectively.$0.87, respectively (as adjusted for the Reverse Split). The trading price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•general market and economic conditions;
•the low trading volume and limited public market for our common stock; and
•minimal third-party research regarding our company; and
•the current and anticipated future operating performance and equity valuation of Sharecare, in which we have a significant equity investment.company.
In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. Such broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.
Holders of our warrants will have no rights as a common stockholder until they exercise their warrants and acquire our common stock.
Until a holder of our warrants acquires shares of our common stock upon exercise of such warrants, such holder will have no rights with respect to shares of our common stock issuable upon exercise of the warrants. Upon exercise of warrants by, the holder shall become entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.
The concentration of our stock ownership may limit individual stockholder ability to influence corporate matters.
As of March 29, 2021,April 14, 2023, our Chairman and Chief Executive Officer, Kai-Shing Tao, may be deemed to beneficially own 10,200,6341,020,062 shares, or 9.8%7.2% of our common stock, and Lawrence Rosen may be deemed to beneficially own 5,418,616709,487 shares, or 5.4%5.2% of our common stock. The interests of these stockholders may not always coincide with the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders, and might affect the prevailing market price for our securities.
If these stockholders act together, they may be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate actions. Such concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock.
A significant number of additional shares of our common stock may be issued under the terms of existing securities, which issuances would substantially dilute existing stockholders and may depress the market price of our common stock.
As of March 29, 2021,April 14, 2023, we had outstanding stock options allowing for the purchase of as many as approximately 15.31.6 million shares of common stock. Also outstanding were (i) convertible debentures we issued to Ionic Ventures, LLC (“Ionic”) with an aggregate outstanding balance of $2,778,000, (ii) shares of our common stock issuable upon exercise of a warrant we issued to Armistice Capital Master Fund Ltd. in a private placement (the “Investor Warrant”), which is exercisable for as many as 423,729 shares of common stock, (iii) warrants to purchase as many as an aggregate of 12,712 shares of our common stock issued to A.G.P./Alliance Global Partners and its designees (the “Financial Advisor Warrants”), which are exercisable for as many as an aggregate of 12,712 shares of common stock, (iv) warrants we issued as part of the consideration for our acquisition of assets of China Branding Group Limited (the “CBG Acquisition” and such warrants, the “CBG Acquisition Warrants”(“CBG”), providing for the right to purchase 40,000 shares of common stock at per-share exercise prices of $10.00. We are also obligated to issue additional CBG Acquisition Warrants allowing for the purchase of 5,710,0004,000 shares of common stock at a per-share exercise price of $10.00 (we have already accounted$100.00 (the “CBG Acquisition Warrants”) and (v) warrants we issued pursuant to a settlement agreement that we entered into with CBG and its joint official liquidators, providing for the liability associated with such unissued CBG Acquisition Warrants in our consolidated balance sheet as partright to purchase 571,000 shares of common stock at a per share exercise price of $60.00 (the “CBG Settlement Warrants”).
The Investor Warrant is immediately exercisable and will expire on October 31, 2027. However, we are prohibited from effecting an exercise of the line itemInvestor Warrant, liability). On February 21, 2018, we initiated a legal proceeding seeking, among other things, a declaration that we areand the holder thereof will not requiredhave the right to deliver the unissued CBG Acquisition Warrants. The partiesexercise any portion of its Investor Warrant, to the proceeding entered intoextent that, as a Stipulation for Settlement which sets forth terms with respectresult of such exercise, the warrant holder would beneficially own more than 4.99% of the outstanding shares of our common stock immediately after giving effect to the issuance of such unissued CBG Acquisition Warrants. We describeshares of issuable upon exercise of the Stipulation for Settlement in more detail in Item 3Investor Warrant. The Financial Advisor Warrants are immediately exercisable and will expire on the five-year anniversary of this 2020 Form 10-K.the date of issuance.
The CBG Acquisition Warrants and the CBG Settlement Warrants are exercisable on a cashless basis only, such that they cannot be exercised for the entire amount of shares purchasable under thesuch warrants, and they effectively cannot be exercised to purchase shares of common stock unless the applicable market value of the common stock exceeds the applicable exercise price under the terms thereof.
The issuance of common stock pursuant to the warrants and the debentures described above would substantially dilute the proportionate ownership and voting power of existing stockholders, and their issuance, or the possibility of their issuance, may depress the market price of our common stock.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of Remark more difficult, which acquisition may be beneficial to stockholders.
Provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of the General Corporation Law of the State of Delaware (“DGCL”), which may discourage, delay or prevent a merger with, acquisition of or other change in control of Remark, even if such a change in control would be beneficial to our stockholders, include the following:
•only our Board of Directors may call special meetings of our stockholders;
•our stockholders may take action only at a meeting of our stockholders and not by written consent;
•we have authorized, undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval.
Additionally, Section 203 of the DGCL prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. We have not opted out of the restriction under Section 203, as permitted under DGCL.
ITEM 1B. UNRESOLVED STAFF COMMENTS
NoneNot applicable.
ITEM 2. PROPERTIES
We conduct our operations primarily from office space located in Las Vegas, Nevada, and Chengdu, China. The locations are leased pursuant to agreements expiring in March 2023 and September 2022,October 2024, respectively. We also lease support offices in Shanghai and Hangzhou, China.China and in the Greater London region in England.
ITEM 3. LEGAL PROCEEDINGS
CBG Litigation
On February 21, 2018, we initiated a legal proceeding (the “CBG Litigation”) against China Branding Group Limited (“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.None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicableapplicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock is listed on the NASDAQNasdaq Capital Market under the symbol MARK.
HOLDERS OF COMMON STOCK
We had 8066 holders of record of our common stock as of March 29, 2021.April 14, 2023.
DIVIDENDS
We have never declared or paid dividends or distributions on our common equity. We currently intend to retain all available funds and any future consolidated earnings to fund our operations and continue the development and growth of our business; therefore, we do not anticipate paying any cash dividends.
UNREGISTERED SALES OF EQUITY SECURITIES
Not ApplicableITEM 6. RESERVED
ISSUER PURCHASES OF EQUITY SECURITIESNot Applicable
ITEM 6. SELECTED FINANCIAL DATA
Not applicable
ITEM 7. 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 year ended December 31, 20202022 in conjunction with our consolidated financial statements and notes thereto set forth in Part II, Item 8 of this 2020 Form 10-K. Such discussion and analysis includes forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. You should also read Business,, Risk Factors and Special Note Regarding Forward-Looking Statements in this 2020 Form 10-K.
OVERVIEW
We are a diversified global technology companybusiness with leading artificial intelligenceAI and data-analytics, solutions, and we also own and operate an e-commerceas well as a portfolio of digital media property focused on a luxury beach lifestyle.properties.
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 software 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.Corporate Structure
We continueare a holding company incorporated in Delaware and not a Chinese operating company. As a holding company, we conduct most of our operations through our subsidiaries, each of which is wholly owned. We have historically conducted a significant part of our operations through contractual arrangements between our WFOE and certain VIEs based in China to market Remark AI’s innovative AI-based solutionsaddress challenges resulting from laws, policies and practices that may disfavor foreign-owned entities that operate within industries deemed sensitive by the Chinese government. We were the primary beneficiary of the VIEs because the contractual arrangements governing the relationship between the VIEs and our WFOE, which included an exclusive call option agreement, exclusive business cooperation agreement, a proxy agreement and an equity pledge agreement, enabled us to customers(i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive call option to purchase, at any time, all or part of the equity interests in and/or assets of the retail, urban life cycle and workplace and food safety markets.VIEs to the extent permitted by Chinese laws. Because we were the primary beneficiary of the VIEs, we consolidated the financial results of the VIEs in our consolidated financial statements in accordance with GAAP.
Retail Solutions. Utilizing a client’s existing camerasWe terminated all of the contractual arrangements between the WFOE and IoT devices placed throughout the store, Remark AI’s retail solutions swiftly analyze real-time customer shopping behavior,VIEs and exercised our rights under the exclusive call option agreements between the WFOE and the VIEs such that, effective as time of store entrySeptember 19, 2022, we obtained 100% of the equity ownership of the entities we formerly consolidated as VIEs 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 whatwhich 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 suchnow consolidate 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.
Biosafety Businesswholly-owned subsidiaries.
The first halffollowing diagram illustrates our corporate structure, including our significant subsidiaries, as of 2020 was onethe date of renewed focus for us as we repurposedthis Form 10-K. The diagram omits certain entities which are immaterial to our results of operations 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.financial condition.
We are subject to certain legal and operational risks associated with having a significant portion of our operations in China. Chinese laws and regulations governing our current business operations, including the enforcement of such laws and regulations, are sometimes vague and uncertain and can change quickly with little advance notice. The Chinese government may intervene in or influence the operations of our China-based subsidiaries at any time and may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our securities. In addition, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors and cause the value of such securities to
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significantly decline or become worthless. In recent years, the Chinese government adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to the use of variable interest entities, cybersecurity, data security, export control and anti-monopoly concerns. As of the date of this Form 10-K, we have neither been involved in any investigations on cybersecurity review initiated by any Chinese regulatory authority, nor received any inquiry, notice or sanction. As of the date of this Form 10-K, no relevant laws or regulations in China explicitly require us to seek approval from the CSRC for any securities listing. As of the date of this Form 10-K, we have not received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other Chinese governmental authorities relating to securities listings. However, since these statements and regulatory actions are newly published, official guidance and related implementation rules have not all been issued. It is highly uncertain what potential impact such modified or new laws and regulations will have on our ability to conduct our business, accept investments or list or maintain a listing on a U.S. or foreign exchange.
As of the date of this Form 10-K, we are not required to seek permissions from the CSRC, the CAC, or any other entity that is required to approve our operations in China. Nevertheless, Chinese regulatory authorities may in the future promulgate laws, regulations or implement rules that require us or our subsidiaries to obtain permissions from such regulatory authorities to approve our operations or any securities listing.
Holding Foreign Companies Accountable Act
The HFCA Act was enacted on December 18, 2020. The HFCA Act states that if the SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market in the United States. On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction. The Consolidated Appropriations Act, 2023, which was signed into law on December 29, 2022, amended the HFCA Act to reduce the number of consecutive non-inspection years required to trigger the trading prohibition under the HFCA Act from three years to two years.
On December 16, 2021, the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by Chinese and Hong Kong authorities in those jurisdictions.
On August 26, 2022, the CSRC, the Ministry of Finance of the PRC, and the PCAOB signed a Statement of Protocol, taking the first step toward opening access for the PCAOB to completely inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong.
On December 15, 2022, the PCAOB vacated its 2021 determination that the positions taken by authorities in mainland China and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions. In view of the PCAOB’s decision to vacate its 2021 determination and until such time as the PCAOB issues any new adverse determination, the SEC has stated that there are no issuers at risk of having their securities subject to a trading prohibition under the HFCA Act. Each year, the PCAOB will reassess its determinations on whether it can inspect and investigation completely audit firms in China, and if, in the future, the PCAOB determines it cannot do so, or if Chinese authorities do not allow the PCAOB complete access for inspections and investigations for two consecutive years, companies engaging China-based public accounting firms would be delisted pursuant to the HFCA Act.
Our auditor, Weinberg & Company, an independent registered public accounting firm headquartered in the United States, is currently subject to PCAOB inspections and has been inspected by the PCAOB on a regular basis. However, if the PCAOB is unable to inspect the work papers of our accounting firm in the future, such lack of inspection could cause trading in our common stock to be prohibited under the HFCA Act, and as a result, an exchange may determine to delist our common stock. The delisting and the cessation of trading of our common stock, or the threat of our common stock being delisted and prohibited from being traded, may materially and adversely affect the value of our common stock.
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Transfer of Cash or Assets
Dividend Distributions
As of the date of this Form 10-K, none of our subsidiaries have made any dividends or distributions to the parent company.
We have never declared or paid dividends or distributions on our common equity. We currently intend to retain all available funds and any future consolidated earnings to fund our operations and continue the development and growth of our business; therefore, we do not anticipate paying any cash dividends.
Under Delaware law, a Delaware corporation’s ability to pay cash dividends on its capital stock requires the corporation to have either net profits or positive net assets (total assets less total liabilities) over its capital. If we determine to pay dividends on any of our common stock in the future, as a holding company, we may rely on dividends and other distributions on equity from our subsidiaries for cash requirements, including the funds necessary to pay dividends and other cash contributions to our stockholders.
Our WFOE’s ability to distribute dividends is based upon its distributable earnings. Current Chinese regulations permit our WFOE to pay dividends to its shareholder only out of its registered capital amount, if any, as determined in accordance with Chinese accounting standards and regulations, and then only after meeting the requirement regarding statutory reserve. If our WFOE incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Any limitation on the ability of our WFOE to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business. In addition, any cash dividends or distributions of assets by our WFOE to its stockholder are subject to a Chinese withholding tax of as much as 10%.
The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. If we are unable to receive all of the revenues from our operations through our China-based subsidiaries, we may be unable to pay dividends on our common stock.
AI Business
We generate revenue by using the proprietary data and AI software platform we developed to deliver AI-based computer vision products, computing devices and software-as-a-service solutions for businesses in many industries. We continue to partner with top universities on research projects targeting algorithm, artificial neural network and computing architectures which we believe will keep us among the leaders in technology development.
The primary focus of our business is promoting and facilitating the safety of our customers and their customers through our Smart Safety Platform (the “SSP”). The SSP, having won numerous industry and government benchmark tests for accuracy and speed, is a leading software solution for using computer vision to detect persons, objects and behavior in video feeds. Real-time alerts from the SSP allow operations staff to respond rapidly to prevent any events or activities that can endanger public security or workplace safety.
We deploy the SSP to integrate with each customer’s IT infrastructure, including, in many cases, cameras already in place at the customer’s location(s). When necessary, we also sell and deploy hardware to create or supplement the customer’s monitoring capabilities. Such hardware includes, among other items, cameras, edge computing devices and/or our Smart Sentry units. The Smart Sentry is a large mobile camera unit with a telescoping mast on which a high-quality camera is mounted. Based upon customer needs, the camera may have either standard vision and/or thermal vision capability. The camera works in conjunction with an edge computing device that is also mounted to the unit. The Smart Sentry is an example of how we incorporate the SSP in modern IT architectural concepts, including edge computing and micro-service architectures. Edge computing, for example, allows the SSP to conduct expensive computing tasks at distributed locations without requiring large data transmission over the internet, thereby dramatically reducing costs while integrating numerous and varied sensors at distributed locations.
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We customize and sell our innovative AI-based computer vision products and solutions, including the SSP, to customers in the retail, construction, public safety, workplace safety and public sector markets. We have also developed versions of our solutions for application in the transportation and energy markets.
Overall Business Outlook
OurThe innovative AI and data analytics solutions we sell 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.customer experiences. 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, especially in response to the COVID-19 pandemic.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. QuicklyIn addition, we may face a large number of well-known competitors which would make deploying our software solutions in the market segments we have identified difficult.
Inflation and Supply Chain
Other than the impact of inflation on the general economy, we do not believe that inflation has had a material effect on our operations to date. However, there is a risk that our operating costs could be subject to inflationary pressures in the future, which would have the effect of increasing our operating costs and cause additional stress on our working capital resources.
We have not experienced any supply chain disruptions that have had a material effect on our operations to date. However, as we work to increase our sales of the SSP in the U.S. and thereby expand our business, we could be subjected to the risk of supply chain disruptions with regard to high-technology products such as servers and related equipment that we use to train our AI software algorithms and which we may face a numberplan to sell to customers to support operation of large, well-known competitors, is also difficult.the SSP.
Business Developments During 20202022
After spending most of the first quarter of 2020 on product developmentThe COVID-19 pandemic caused renewed lockdowns in China, which made it difficult for us to interact with our customers and relationship building,vendors. While 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 ourcomplete several larger contracts in China, such as the China Mobile project and the projects 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 business. 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 second half 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 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 during the first half of 2021 or longer,2022, primarily during the first quarter, including construction projects obtained through an entity in China with whom we work to obtain business (our “China Business Partner”) and projects related to school campuses, ongoing lockdowns throughout the second, third and fourth quarters prevented us from being able to complete as many projects as we are unableotherwise had planned to predictcomplete during the duration or degree of such impact with any certainty.year ended December 31, 2022.
The following table presents our revenue categories as a percentage of total consolidated revenue during the years ended December 31, 20202022 and 2019.2021.
| | | Year Ended December 31, | | | Year Ended December 31, |
| | 2020 | | 2019 | | | 2022 | | 2021 |
| AI-based products services | 95 | % | | 72 | % | |
| AI-based products and services | | AI-based products and services | | 94 | % | | 93 | % |
| Advertising and other | Advertising and other | 5 | % | | 28 | % | Advertising and other | | 6 | % | | 7 | % |
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CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of our results of operations and liquidity and capital resources is based upon our financial statements. We prepare our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”).U.S. GAAP. Certain of our accounting policies require that we apply significant judgment in determining the estimates and assumptions for calculating estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We use, in part, our historical experience, terms of existing contracts, observance of trends in the industry and information obtained from independent valuation experts or other outside sources to make our judgments. We cannot assure
you that our actual results will conform to our estimates. We regularly evaluate these estimates and assumptions, particularly in areas we consider to be critical accounting estimates, where changes in estimates and assumptions could have a material impact on our results of operations, financial position and, generally to a lesser extent, cash flows.
Senior management and the Audit Committee of the Board of Directors have reviewed the disclosures included herein about our critical accounting estimates, and have reviewed the processes to determine those estimates.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the period. Estimates incorporated into our consolidated financial statements include the estimated useful livesreserve for depreciable and amortizable assets, the fair value of the liabilities related to certain stock warrants we issued,bad debt, inventory reserve, the fair value of stock options issued under our equity incentive plans, and the estimated cash flows we use in assessing the recoverability of long-lived assets, and the estimated fair values we use when indicators suggest the need to quantitatively test goodwill for impairment.assets. Actual results could differ from those estimates.
Accounting for Share-Based Compensation
For grants of restricted stock or restricted stock units, we measure fair value using the closing price of our stock on the measurement date, while we use the Black-Scholes-Merton option pricing model (the “BSM Model”) to estimate the fair value of stock options and similar instruments awarded.
The BSM Model requires the following inputs:
•Expected volatility of our stock price. We analyze the historical volatility of our stock price utilizing daily stock price returns, and we also review the stock price volatility of certain peers. Using the information developed from such analysis and our judgment, we estimate how volatile our stock price will be over the period we expect the stock options will remain outstanding.
•Risk-free interest rate. We estimate the risk-free interest rate using data from the Federal Reserve Treasury Constant Maturity Instruments H.15 Release (a table of rates downloaded from the Federal Reserve website) as of the valuation date for a security with a remaining term that approximates the period over which we expect the stock options will remain outstanding.
•Stock price, exercise price and expected term. We use an estimate of the fair value of our common stock on the measurement date, the exercise price of the option, and the period over which we expect the stock options will remain outstanding.
We do not currently issue dividends, but if we did so, then we would also include an estimated dividend rate as an input to the BSM model. Generally speaking, the BSM model tends to be most sensitive to changes in stock price, volatility or expected term.
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We measure compensation expense as of the grant date for granted equity-classified instruments and as of the settlement date for granted liability-classified instruments (meaning that we re-measure compensation expense at each balance sheet date until the settlement date occurs).
Once we measure compensation expense, we recognize it over the requisite service period (generally the vesting period) of the grant, net of forfeitures as they occur.
Liabilities Related to Warrants Issued
We record certain common stock warrants we issued (see Note 4 in Notes to Consolidated Financial Statements 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 some of the warrants that we record at fair value as liabilities because they contain certain provisions allowing for reduction of their exercise price, while others are recorded 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 either the BSM Model, for warrants whose terms do not change resulting from dilutive events (i.e., “plain vanilla” warrants), or the Monte Carlo Simulation method. The Monte Carlo Simulation method uses many of the same types of estimated inputs, such as the expected volatility of our stock price, the risk-free interest rate and the expected term of the warrant, as the BSM Model that we use to estimate the fair value of stock options that we issue.
Impairments
Long-Lived Assets Other Than Indefinite-Lived Intangible Assets. When events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, we evaluate long-lived assets for potential impairment. We estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition and, if the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, we recognize an impairment loss for the difference between the carrying value of the asset and its fair value.
Investment. We routinely perform an assessment of our investments in Sharecare and in Beijing All-in-one Cloud Net Technology, Co. Ltd. (“AIO”) to determine if they are other-than-temporarily impaired. An investment is impaired when the fair value of the investment declines to an amount less than the cost or amortized cost of that investment. As part of our assessment process, we determine whether the impairment is temporary or other-than-temporary. We base our assessment on both quantitative criteria and qualitative information, considering a number of factors including, but not limited to how long the security has been impaired, the amount of the impairment, the financial condition and near-term prospects of the issuer, whether the issuer is current on contractually-obligated interest and principal payments, key corporate events pertaining to the issuer and whether the market decline was affected by macroeconomic conditions.
If we determine that an investment has incurred an other-than-temporary impairment, we permanently reduce the cost of the security to fair value and recognize an impairment charge in our consolidated statements of operations.
Recently Issued Accounting Pronouncements
Please refer to Note 2 in the Notes to Consolidated Financial Statements included in this report for a discussion regarding recently issued accounting pronouncements which may affect us.
RESULTS OF OPERATIONS
The following discussion summarizestables summarize our operating results for the year ended December 31, 20202022, and the discussion following the table explains material changes in such operating results compared to the year ended December 31, 2019.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | Year Ended December 31, | | Change |
| | 2020 | | 2019 | | Dollars | | Percentage |
| Revenue | | $ | 10,145 | | | $ | 5,020 | | | $ | 5,125 | | | 102 | % |
| | | | | | | | |
| Cost of revenue | | 6,422 | | | 3,514 | | | 2,908 | | | 83 | % |
| Sales and marketing | | 3,378 | | | 3,003 | | | 375 | | | 12 | % |
| Technology and development | | 4,142 | | | 3,573 | | | 569 | | | 16 | % |
| General and administrative | | 9,368 | | | 14,174 | | | (4,806) | | | (34) | % |
| Depreciation and amortization | | 308 | | | 982 | | | (674) | | | (69) | % |
| Impairments | | 772 | | | 2,522 | | | (1,750) | | | (69) | % |
| Other operating expenses | | — | | | 6 | | | (6) | | | (100) | % |
| Total cost and expenses | | 24,390 | | | 27,774 | | | (3,384) | | | (12) | % |
| | | | | | | | |
| Interest expense | | (1,342) | | | (1,876) | | | 534 | | | (28) | % |
| Other income, net | | — | | | 530 | | | (530) | | | (100) | % |
| Gain on lease termination | | 3,582 | | | — | | | 3,582 | | | |
| Change in fair value of warrant liability | | (1,610) | | | 1,268 | | | (2,878) | | | (227) | % |
| Other gain (loss) | | (70) | | | (172) | | | 102 | | | (59) | % |
| Total Other expense | | 560 | | | (250) | | | 810 | | | (324) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | Year Ended December 31, | | Change |
| 2022 | | 2021 | | Dollars | | Percentage |
Revenue, including amounts from China Business Partner (See Note 19) | $ | 11,666 | | | $ | 15,990 | | | $ | (4,324) | | | (27) | % |
| | | | | | | |
| Cost of revenue | 11,331 | | | 11,455 | | | (124) | | | (1) | % |
| Sales and marketing | 971 | | | 971 | | | — | | | — | % |
| Recovery of marketing expense - China Business Partner activity | — | | | (1,530) | | | 1,530 | | | (100) | % |
| Technology and development | 2,101 | | | 4,692 | | | (2,591) | | | (55) | % |
| General and administrative | 18,399 | | | 14,120 | | | 4,279 | | | 30 | % |
| Depreciation and amortization | 166 | | | 191 | | | (25) | | | (13) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Interest expense | (6,073) | | | (2,308) | | | (3,765) | | | 163 | % |
| Finance cost on liability related to convertible debenture | (1,422) | | | — | | | (1,422) | | | |
| | | | | | | |
| Change in fair value of warrant liability | — | | | 123 | | | (123) | | | (100) | % |
| Gain (loss) on investment in marketable securities | (26,356) | | | 43,642 | | | (69,998) | | | (160) | % |
| Gain on debt extinguishment | — | | | 425 | | | (425) | | | (100) | % |
| Other gain (loss) | (339) | | | (492) | | | 153 | | | (31) | % |
Revenue and Cost of Revenue.During the second half of the year ended December 31, 2020, we ramped up execution2022, our U.S. revenue decreased, with approximately $2.8 million of our larger contracts in China, such as our China Mobile project and the projects with several school districts, such that we were able to complete more projects than we did in 2019 and earn $4.3 million more revenue. Our new biosafety business contributed $1.7 million to the overall increase in revenue as we launched our thermal imaging product line primarily in the U.S beginning in 2020.
The increases in revenue from our project acceleration in China and from our new biosafety business were partially offset by a decrease in the revenue contribution of our Remark Entertainment business of $0.6 million, primarily due to contracts that ended in the prior year thathappening because we did not renew,repeat the same or similar AI data intelligence services and advertising related to a decrease in e-commerce revenue of $0.3 million, primarily due to the combined effects of our decision to sell portions of our inventory at lower costs as well as reduced orders due to changes in consumer spending as a result of the COVID-19 pandemic.
Our cost of revenuedaily fantasy sports project that we completed during the year ended December 31, 2020 primarily increased in conjunction with the ramping up of work on our larger contracts in China, which caused an increase of $2.72021. Our U.S. revenue also decreased by approximately $0.4 million while the new biosafety business added another $1.0 million during the period. The increases were partially offset by a decrease of $0.7 million that resulted because we recorded a full reserve against our e-commerce inventory during 2019, meaning that sales in 2020 had no associated cost of revenue.
Sales and marketing. Marketing expense increased by $1.5 million as a result of a payment we madedue to a third-party computer hardware manufacturerdecline in demand for our biosafety business. Our revenue from China decreased by approximately $0.8 million, primarily due to present a combination of their hardwarethe lengthy lockdowns and our KanKan AI software to large potential clients in response to requests for proposals that could result in lucrative contracts on AI projects to modernize suchother restrictive measures under China’s Zero COVID
potential clients’ facilitiespolicy that were implemented and operations. A decreasecontinued in headcount, including in several more-highly-compensated positions, ledmany cities across China well into the fourth quarter of 2022. Such lockdowns and restrictive measures prevented us from completing as many projects as we had expected to complete.
Recovery of marketing expense - China Business Partner activity. We advanced approximately $1.5 million to our China Business Partner during the year ended December 31, 2020 which we recorded as marketing expense because our ability to collect the amounts advanced was uncertain. Because our China Business Partner repaid, during the year ended December 31, 2021, all of the approximately $1.5 million we advanced to it during the year ended December 31, 2020, we recorded such amount as a decreaserecovery of $0.6 million in payroll-relatedmarketing expense that partially offsetduring 2021. No similar activity occurred during the increase in marketing expense.year ended December 31, 2022.
Technology and Development.development. The increase in our common stock price atDuring the year ended December 31, 2020 as compared to the price2022, consulting fees decreased $1.2 million because we no longer needed certain third-party services after our immaterial acquisition of our common stock on December 31, 2019 causedU.K. subsidiary in mid-2021. Additionally during 2022, we recorded a $0.5 million increaserefundable tax credit we received from the government of the United Kingdom resulting from our research and development activities in its jurisdiction as a reduction of expense, and share-based compensation expense related to our outstanding liability-classified China Cash Awards. Stock price is an input todecreased $0.6 million during the model we use to estimate the fair value of the China Cash Awards, and changes in stock price can cause large fluctuations in our estimates of fair value.same period.
General and administrativeadministrative. . The decrease in general and administrative expense in 2020 fromDuring the corresponding 2019 period was affected by the following:
•Net lease cost decreased by $2.9 million. Asyear ended December 31, 2022, as a result of the early terminationongoing lockdowns related to China’s Zero-COVID policy, we have had to re-evaluate the amounts receivable from customers based on recent information and, as a result, we increased our reserve for doubtful accounts by $2.9 million, causing an increase in provision for doubtful accounts of our lease for our former office located$2.6 million. Additionally, we experienced an increase of $0.6 million in Las Vegas, Nevada (see Note 9 for more information), we recorded additional lease costlegal and other professional fees primarily in connection with financings and the filing of amendments to registration statements, and an increase of $1.5 million in 2019. We also entered into a less-costly lease oncertain business development expenses as we work to expand our current office space in Las Vegas in 2020, resulting incustomer base. Also during the remainder of the decrease in lease cost.
•Bad debt expense decreasedyear ended December 31, 2022, our payroll and benefits increased $0.9 million. The increases were partially offset by $2.0 million because collection patterns have not indicated a need to record a significant allowance in the current year period, while during 2019 we recorded a large increase in the allowance for doubtful accounts because we identified an increased risk that we may not fully collect on certain trade receivables related to our AI projects and our former FinTech business.
• A decrease in headcount contributed to a decrease of approximately $0.6$1.7 million in payroll and related cost.
•An increase of $0.3 million in travel-related expense partially offset the decreases in general and administrative expense noted above, and resulted from increased domestic travel primarily related to the launch of our new biosafety business in the U.S.
•Immaterial increases and decreases affected other accounts in the general and administrative expense category but did not represent trends in our business.
Depreciation and amortization. The decrease in depreciation expense was primarily the result of long-lived assets which were being depreciated or amortized in the prior-year which were no longer being depreciated or amortized in the current year because such assets became fully depreciated or amortized before, or during the early part of, the current year periods.
Impairments. Impairment expense decreased primarily because, during 2019, we recorded a $1.3 million impairment of a security deposit related to our former FinTech business and a $1.0 million impairment of internal-use software projects, while during 2020 we only recorded a $0.4 million impairment of our investment in AIO and a $0.3 million impairment of the intangible asset representing the bikini.com domain name.share-based compensation expense.
Interest expense. Our prepayment of a large portion of our debt whenWe executed the Original Mudrick Loan Agreements in December 2021, pursuant to which we completedobtained the sale of Vegas.com in May 2019 resultedOriginal Mudrick Loans in the decreaseaggregate principal amount of $30.0 million. The Original Mudrick Loans initially bore interest at 16.5% per annum until its maturity date in July 2022 and, following an amendment, bore interest at 18.5% per annum. The interest on the Original Mudrick Loans were the primary cause of the increase in interest expense.
Other income. The amount of other income we recordedexpense during the year ended December 31, 2019 primarily resulted from our release from2022. The same period of the prior year included significantly less debt principal outstanding, with such principal bearing lower interest rates in comparison to the interest rates on the Original Mudrick Loans. Included as part of interest expense during the year ended December 31, 2022 was $2.2 million of amortization of debt discount and debt issuance cost related to the Original Mudrick Loans, as well as a $0.3 million amendment and extension fee.
Finance cost on liability related to convertible debenture. We incurred finance cost on a liability related to our former FinTech business.a convertible debenture we issued to Ionic on October 6, 2022. We had no similar activitydid not incur such finance cost during 2020.2021.
Gain on lease termination.investment in marketable securities. During August 2020,On July 1, 2021, as the result of a business combination involving Sharecare, Inc. and a special purpose acquisition company, our equity in Sharecare, Inc. converted into cash and shares of publicly traded common stock. As a result of the common stock of Sharecare being traded on a national securities exchange, we entered intowere able to remeasure our investment at fair value. Since July 1, 2021, the value of Sharecare’s common stock has declined significantly, which caused the decrease from 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 alarge gain on lease termination of $1.5 million. In addition, we recognized a further gain of $2.0 millioninvestment during August 2020, when we entered into the Hughes Center Lease Settlement (as defined below). The comparable period of the prior year, reflected no comparable activity.
Change in fair valueto the loss of warrant liability. The fair value of our warrant liability maintains a direct relationship with the price of our common stock. The increase in our common stock price between December 31, 2019 and December 31, 2020 caused the increase in the fair value of our warrant liability for$26.4 million during the year ended December 31, 2020, while the decrease in our common stock price between December 31, 2018 and December 31, 2019 caused the decrease in fair value during the year2022.
Gain on debt extinguishment. During the year ended December 31, 2019. Partially offsetting2021, we received notification during the effectthird quarter of 2021 that our previously-outstanding loan under the stock price increasePaycheck Protection Program had been forgiven, resulting in a gain of approximately $0.4 million. No similar activity occurred during 2020 was the one-year decrease in the amount of time the warrants are expected to be outstanding.2022.
LIQUIDITY AND CAPITAL RESOURCES
Overview
During the year ended December 31, 2020,2022, and in each fiscal year since our inception, we have incurred net losses which hashave resulted in an accumulated deficit of $360.5$(388.5) million within stockholders’ deficit as of December 31, 2020.2022. Additionally,
our operations have historically used more cash than they have provided. Net cash used in continuing operating activities was $18.0$16.6 million during the year ended December 31, 2020.2022. As of December 31, 2020,2022, our cash and cash equivalents balance was $0.9$0.1 million.
Mudrick Loans
On December 3, 2021, we entered into the Original Mudrick Loan Agreements pursuant to which we incurred the Original Mudrick Loans in the aggregate principal amount of $30.0 million. The Original Mudrick Loans initially bore interest at 16.5% per annum until the original maturity date of July 31, 2022 and, following an amendment we entered into with Mudrick in August 2022, bore interest at 18.5% per annum. The amendment also extended the maturity date of the Original Mudrick Loans from July 31, 2022 to October 31, 2022. However, we did not make the required repayment of the Original Mudrick Loans by October 31, 2022, which constituted an event of default under the Original Mudrick Loans and triggered an increase in the interest rate under the Original Mudrick Loans to 20.5%.
On March 14, 2023, we entered into the New Mudrick Loan Agreement pursuant to which all of the Original Mudrick Loans were cancelled in exchange for the New Mudrick Notes in the aggregate principal amount of $16.2 million. The New Mudrick Notes bear interest at a rate of 20.5% per annum, which shall be payable on the last business day of each month commencing on May 31, 2023. The interest rate will increase by 2% and the principal amount outstanding under the New Mudrick Notes and any unpaid interest thereon may become immediately due and payable upon the occurrence of any event of default under the New Mudrick Loan Agreement. All amounts outstanding under the New Mudrick Notes, including all accrued and unpaid interest, will be due and payable in full on October 31, 2023. See Note 20 in the Notes to Consolidated Financial Statements included in this Form 10-K for additional information regarding the New Mudrick Notes.
To secure the payment and performance of the obligations under the Original Mudrick Loan Agreements and the New Mudrick Loan Agreement, we, together with the Guarantors, have granted to TMI Trust Company, as the collateral agent for the benefit of Mudrick, a first priority lien on, and security interest in, all assets of Remark and the Guarantors, subject to certain customary exceptions.
In connection with our entry into the Original Mudrick Loan Agreements, we paid to Mudrick an upfront fee equal to 5.0% of the amount of the Original Mudrick Loans, which amount was netted against the drawdown of the Original Mudrick Loans. We recorded the upfront fee as a debt discount of $1.5 million, and we had a negative working capital balancerecorded debt issuance cost totaling $1.1 million. We amortized the discount on the Original Mudrick Loans and the debt issuance cost over the life of $8.3 million. Our net revenuethe Original Mudrick Loans and, during the year ended December 31, 20202022, we amortized $2.2 million of such discount and debt issuance cost. In consideration for the amendment we entered into with Mudrick in August 2022, we paid Mudrick an amendment and extension fee in the amount of 2.0% of the then unpaid principal balance of the Original Mudrick Loans, which was $10.1 million.
We were a partyapproximately $0.3 million, by adding such amount to the Financing Agreementprincipal balance of the Original Mudrick Loans.
As of the date of this Form 10-K, the principal amount outstanding, together with interest on the Lendersunpaid principal balance of the New Mudrick Notes, is $16.2 million.
Ionic Transactions
On October 6, 2022, we entered into a debenture purchase agreement (the “2022 Debenture Purchase Agreement”) with Ionic, pursuant to which we issued a convertible subordinated debenture in the Lenders extended creditoriginal principal amount of $2.8 million (the “2022 Debenture”) to us consistingIonic for a purchase price of $2.5 million (See Note 15 in the Notes to Consolidated Financial Statements included in this report for additional detail).
In connection with the 2022 Debenture, on October 6, 2022, we also entered into a purchase agreement with Ionic (the “ELOC Purchase Agreement”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Ionic to purchase up to an aggregate of $50.0 million of shares of our common stock over the 36-month term loanof the ELOC Purchase Agreement. Under the ELOC Purchase Agreement, after the satisfaction of certain commencement conditions, we have the right to present Ionic with a purchase notice directing Ionic to purchase any amount up to $3.0 million of our common stock per trading day, at the purchase price equal to 90% (or 80% if our common stock is not then trading on Nasdaq) of the average of the five lowest volume-weighted average prices (“VWAPs”) of our common stock over a specified measurement period. With each purchase under the ELOC Purchase Agreement, we are required to deliver to Ionic an additional number of shares equal to 2.5% of the number of shares of common stock deliverable upon such purchase (See Note 15 in the Notes to Consolidated Financial Statements included in this report for additional detail).
On November 7, 2022, we entered into an amendment to the 2022 Debenture Purchase Agreement with Ionic, pursuant to which we and Ionic agreed to amend and restate the 2022 Debenture to provide that (i) in no event will the conversion price under the 2022 Debenture be below a floor price of $0.10 (such price, as may be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction, the “Floor Price”), and (ii) in the event the actual conversion price is less than the Floor Price, (A) Ionic will be entitled to that number of settlement conversion shares issuable with an assumed conversion price equal to the Floor Price, and (B) we will be required to make a cash payment to Ionic on or prior to the maturity date of an amount that is calculated by subtracting the number of shares of common stock issuable at an assumed conversion price equal to the Floor Price from the number of shares of common stock issuable at the actual conversion price, multiplied by a price equal to the average of the ten lowest VWAPs during the specified measurement period.
On January 5, 2023, we and Ionic entered into a letter agreement (the “Letter Agreement”) which amended the ELOC Purchase Agreement. Under the Letter Agreement, the parties agreed, among other things, to (i) amend the floor price below which Ionic will not be required to buy any shares of our common stock under the ELOC Purchase Agreement from $0.25 to $0.20, determined on a post-reverse split basis, (ii) amend the per share purchase price for purchases under the ELOC Purchase Agreement to 90% of the average of the two lowest daily VWAPs over a specified measurement period, which will commence at the conclusion of the applicable measurement period related to the 2022 Debenture and (iii) waive certain requirements in the ELOC Purchase Agreement to allow for a one-time $0.5 million purchase under the ELOC Purchase Agreement. See Note 20 in the Notes to Consolidated Financial Statements included in this report for additional detail.
On March 14, 2023, we entered into another debenture purchase agreement (the “2023 Debenture Purchase Agreement”) with Ionic pursuant to which we authorized the issuance and sale of two convertible subordinated debentures in the aggregate principal amount of $35.5$2.8 million for an aggregate purchase price of $2.5 million. The first debenture is in the original principal amount of $1.7 million for a purchase price of $1.5 million (the “First Debenture”), which was issued on March 14, 2023, and the second debenture is in the original principal amount of $1.1 million for a purchase price of $1.0 million (the “Second Debenture” and collectively with the First Debenture, the “2023 Debentures”). The terms of the 2023 Debentures are further described in Note 20 in the Notes to Consolidated Financial Statements included in this report.
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 December 31, 2020, we owed $1.5 million in principal and $0.5 million 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 a new common stock agreement (the “2020 Aspire Purchase Agreement”), later amended on April 9, 2020, with Aspire Capital Fund, LLC (“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.General
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 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 2020 Form 10-K. 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 toas a result of the COVID-19 pandemic)pandemic, global supply chain disruptions, inflation and other cost increases, and the geopolitical conflict in Ukraine), 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 March 31, 2022.June 30, 2023.
Cash Flows - Continuing Operating Activities
We used $5.4 million more cash from operating activities duringDuring the year ended December 31, 20202022, we used $3.6 million less cash in operating activities than we did during the year ended December 31, 2019.same period of the prior year. The increasedecrease in cash used in continuing operating activities partially resulted fromis primarily the $1.5 million payment we made to try to win lucrative contracts on AI projects to modernize potential clients’ facilities and operations in China, and is also 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 investingInvesting activities forduring the year ended December 31, 2020, and the change2022 provided $6.3 million in investing activities from the comparable period of the prior year was not material, exclusive of the proceeds from the sale of Vegas.coma portion of our marketable securities, compared to $2.3 million received in the priorsame period during year period.ended December 31, 2021 from the business combination of Sharecare, Inc. and a special purpose acquisition company, as a result of which the common stock of Sharecare, Inc. became publicly traded.
Cash Flows - Financing Activities
During the year ended December 31, 2020,2022, we received $32.0$2.7 million of proceeds from salesfinancings, repaid $6.2 million of sharesthe Original Mudrick Loans, and received $3.3 million of advances from senior management representing various operating expense payments made on our behalf while we repaid $2.1 million of advances from senior management. The prior year period’s financing activity included $32.2 million of net debt proceeds plus $5.7 million of proceeds from issuances 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 $10.8 million.shares. We also received debt proceeds of $1.4 million and repaid $13.8$6.5 million of debt during the year ended December 31, 2020, while the same period ofin 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.year.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
Please refer to Note 2 in the Notes to Consolidated Financial Statements included in this report for a discussion regarding recently issued accounting pronouncements which may affect us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicableapplicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We have included the required financial statements and schedules in this 2020 Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to provide reasonable assurance that the information we must disclose in reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We designed our disclosure controls with the objective of ensuring we accumulate and communicate this information to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under Exchange Act, as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that, due to the identification of the material weaknesses in our internal control over financial reporting as further described below, our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2020.2022. Notwithstanding the material weaknesses in our internal control over financial reporting, the consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20202022 based on the framework set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”).
Our internal control over financial reporting includes those policies and procedures that: (a) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles,GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. During 2018, management identified material weaknesses related to the sufficiency of
documentation of review and approval of manual journal entries. Specifically, we failed to retain documentary evidence that we had reviewed underlying information at a sufficient level of detail. As a result, we are unable to demonstrate our effective review prior to approval of manual journal entries. Management also identified a material weakness related to insufficient documentation of our consideration of appropriate revenue recognition criteria for certain contracts arising from our Technology and Data Intelligence segment. As a result, there is a risk that we could misapply the new revenue recognition guidance and improperly recognize revenue. During 2019, management identified a material weakness related to the valuation of its e-commerce inventory. Specifically, we failed to retain documentary evidence of all inventory purchases and our evaluation of the impact of discounted sales transactions on the valuation of our inventory was insufficient. As a result, there is a risk that we could fail to properly record our e-commerce inventory at the lower of cost or net realizable value.
During our fourth quarter of 2020evaluations in 2022 and 2019 evaluations,2021, management concluded that we did not select and develop control activities that contributed to the mitigation of risks to acceptable levels, as required by the control activities component of the COSO framework; specifically, we had not completed implementation of our remediation plan related to the material weaknesses we identified during 2018.2018 and 2019. Such material weaknesses included deficiencies in the documentation of appropriate review and approval of manual journal entries, in our consideration of appropriate revenue recognition criteria for certain contracts arising from our Technology and Data Intelligence segment,business in China, and in our monitoring and activity-level controls specific to various business processes withinin our Technology and Data Intelligence segment.business in China. The failure to retain appropriate documentation of our review and approval of manual journal entries has a pervasive impact and, as such, this deficiency resulted in a risk that could have impacted virtually all financial statement account balances and disclosures. Regarding our Technology and Data Intelligence segment,business in China, the failure to document consideration of appropriate revenue recognition for certain contracts resulted in a risk that could have materially impacted revenue and cost of sales, while we noted deficiencies in our monitoring and activity-level controls related to processes including accounts payable, accrued liabilities, payroll and fixed assets. The deficiencies in the various business processes aggregate to a material weakness.
Based upon our evaluation, our management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020.2022.
Changes in Internal Control over Financial Reporting
Except for the identified material weaknesses, there was no change in our internal control over financial reporting during the fiscal quarter ended December 31, 20202022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Remediation Efforts to Address the Material Weakness
We are committed to maintaining a strong internal control environment and will make remediation efforts to improve our controls. With the oversight of senior management, subsequent to December 31, 2018, a plan to remediate the underlying causes of the material weaknesses and improve the design and operating effectiveness of internal control over financial reporting and our disclosure controls was developed. Though the implementation of management’s plans to remediate the material weaknesses identified in 2018 and 2019 have been slowed by various factors, including the COVID-19 pandemic and working capital restrictions, their implementation is still ongoing; therefore, their effects were not fully mitigated in 2020.2022.
ITEM 9B. OTHER INFORMATION
None
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We incorporate the information this item requires by referring to the information under the captions Proposal 1: Election of Directors in our proxy statement for our 20212023 annual meeting of stockholders (“20212023 Proxy Statement”), which we will file with the SEC pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
We incorporate the information this item requires by referring to the information under the caption Executive Compensation in our 20212023 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
We incorporate the information this item requires by referring to the information under the caption Security Ownership of Certain Beneficial Owners and Management in our 20212023 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents certain information as of December 31, 20202022 regarding our equity compensation plans (the 2010 Equity Incentive Plan, the 2014 Incentive Plan, the 2017 Incentive Plan, and the 20172022 Incentive Plan, all of which were approved by our security holders):
| | Plan category | Plan category | | Number of Common Stock Shares to be Issued upon Exercise of Outstanding Options | | Weighted Average Exercise Price of Outstanding Options | | Number of Securities Remaining Available for Future Issuance under Plans | Plan category | | Number of Common Stock Shares to be Issued upon Exercise of Outstanding Options | | Weighted Average Exercise Price of Outstanding Options | | Number of Securities Remaining Available for Future Issuance under Plans |
| Approved by security holders | Approved by security holders | | 15,345,841 | | | $ | 3.97 | | | 3,652,101 | | Approved by security holders | | 1,626,631 | | | $ | 30.31 | | | 1,218,385 | |
| Not approved by security holders | Not approved by security holders | | — | | | $ | — | | | — | | Not approved by security holders | | — | | | $ | — | | | — | |
The 2010 Equity Incentive Plan has expired, but options issued under the plan while it was active remain outstanding.
See more detailed information regarding our equity compensation plans in Note 1217 in the Notes to Consolidated Financial Statements in this 2020 Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
We incorporate the information this item requires by referring to the information under the captions Proposal 1: Election of Directors and Corporate Governance in our 20212023 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
We incorporate the information this item requires by referring to the information under the caption Proposal 2: Ratification of Appointment of Independent Registered Public Accounting Firm in our 20212023 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this 2020 Form 10-K:
Consolidated Financial Statements
In Part II, Item 8, we have included our consolidated financial statements, the notes thereto and the report of our Independent Registered Public Accounting Firm.
Financial Statement Schedules
We have omitted schedules required by applicable SEC accounting regulations because they are either not required under the related instructions, are inapplicable, or we present the required information in the financial statements or notes thereto.
Exhibits
We describe the exhibits filed as part of, or incorporated by reference into, this 2020 Form 10-K in the attached Exhibit Index.
EXHIBIT INDEX
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated Herein
By Reference To |
| Exhibit Number | | Description | | Document | | Filed On | | Exhibit Number |
2.1 1 | | | | 8-K | | 08/20/2015 | | 2.1 |
2.2 1 | | | | 8-K | | 09/26/2016 | | 2.1 |
2.3 1 | | | | 8-K | | 03/19/2019 | | 2.1 |
| 3.1 | | | | 8-K | | 12/30/2014 | | 3.1 |
| 3.2 | | | | 8-K | | 01/12/2016 | | 3.1 |
| 3.3 | | | | 8-K | | 06/08/2016 | | 3.1 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated Herein
By Reference To |
| Exhibit Number | | Description | | Document | | Filed On | | Exhibit Number |
| | | | 8-K | | 12/30/2014 | | 3.1 |
| | | | 8-K | | 01/12/2016 | | 3.1 |
| | | | 8-K | | 06/08/2016 | | 3.1 |
| | | | 8-K | | 04/11/2017 | | 3.1 |
| | | | 8-K | | 07/09/2021 | | 3.1 |
| | | | 8-K | | 12/21/2022 | | 3.1 |
| | | | 8-K | | 02/13/2015 | | 3.1 |
| | | | 10-K | | 03/23/2012 | | 4.1 |
| | | | 8-K | | 09/26/2016 | | 4.1 |
| | | | 8-K | | 03/04/2020 | | 4.1 |
| | | | 8-K | | 09/07/2021 | | 4.1 |
| | | | 8-K | | 09/30/2021 | | 4.1 |
| | | | 8-K | | 09/30/2021 | | 4.2 |
| | | | 10-K | | 03/31/2021 | | 4.4 |
| | | | 8-K | | 10/11/2022 | | 4.1 |
| | | | 10-Q | | 11/14/2022 | | 4.1 |
| | | | 8-K | | 03/16/2023 | | 4.1 |
| | | | 8-K | | 06/21/2010 | | 10.34 |
| | | | 8-K | | 01/12/2016 | | 10.1 |
| | | | 8-K | | 01/24/2018 | | 10.1 |
| | | | 10-Q | | 11/14/2022 | | 10.1 |
| | | | 8-K | | 03/04/2020 | | 10.1 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated Herein
By Reference To |
| Exhibit Number | | Description | | Document | | Filed On | | Exhibit Number |
| 3.4 | | | | 8-K | | 04/11/2017 | | 3.1 |
| 3.5 | | | | 8-K | | 06/04/2015 | | 3.1 |
| 3.6 | | | | 8-K | | 02/13/2015 | | 3.1 |
| 3.7 | | | | 8-K | | 07/20/2020 | | 3.1 |
| 3.8 | | | | 8-K | | 07/24/2020 | | 3.1 |
| 3.9 | | | | 8-K | | 07/31/2020 | | 3.1 |
| 4.1 | | | | 10-K | | 03/23/2012 | | 4.1 |
| 4.2 | | | | 8-K | | 09/26/2016 | | 4.1 |
| 4.3 | | | | 8-K | | 04/05/2019 | | 4.1 |
| 4.4 | | | | | | | | |
10.1 2 | | | | 8-K | | 06/21/2010 | | 10.34 |
10.2 2 | | | | 8-K | | 01/12/2016 | | 10.1 |
10.3 2 | | | | 8-K | | 01/24/2018 | | 10.1 |
| 10.4 | | | | 8-K | | 04/05/2019 | | 10.1 |
| 10.5 | | | | 8-K | | 4/14/20 | | 10.1 |
| 10.6 | | | | 8-K | | 1/6/21 | | 10.1 |
10.7 1 | | | | | | | | |
| 16.1 | | | | 8-K | | 9/4/20 | | 16.1 |
| 21.1 | | | | | | | | |
| 23.1 | | | | | | | | |
| 23.2 | | | | | | | | |
| 31.1 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated Herein
By Reference To |
| Exhibit Number | | Description | | Document | | Filed On | | Exhibit Number |
| | | | 8-K | | 04/14/2020 | | 10.1 |
| | | | 8-K | | 01/06/2021 | | 10.1 |
| | | | 8-K | | 08/10/2021 | | 10.1 |
| | | | 8-K | | 09/07/2021 | | 10.1 |
| | | | 8-K | | 09/30/2021 | | 10.1 |
| | | | 8-K | | 09/30/2021 | | 10.2 |
| | | | 8-K | | 09/30/2021 | | 10.3 |
| | | | 8-K | | 12/07/2021 | | 10.1 |
| | | | 8-K | | 08/08/2022 | | 10.1 |
| | | | 8-K | | 10/11/2022 | | 10.1 |
| | | | S-1 | | 11/07/2022 | | 10.2 |
| | | | 8-K | | 10/11/2022 | | 10.2 |
| | | | 8-K | | 10/11/2022 | | 10.3 |
| | | | 8-K | | 10/11/2022 | | 10.4 |
| | | | 8-K | | 10/11/2022 | | 10.5 |
| | | | 8-K | | 01/11/2023 | | 10.1 |
| | | | 8-K | | 03/16/2023 | | 10.1 |
| | | | 8-K | | 03/16/2023 | | 10.1 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated Herein
By Reference To |
Exhibit Number | | Description | | Document | | Filed On | | Exhibit Number |
31.2 | | | | | | | | |
32 | | | | | | | | |
101.INS | | XBRL Instance Document | | | | | | |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated Herein
By Reference To |
| Exhibit Number | | Description | | Document | | Filed On | | Exhibit Number |
| | | | 8-K | | 03/16/2023 | | 10.1 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| 101 | | The following financial statements from our Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL: (i) Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021; (ii) Consolidated Statements of Operations and Comprehensive Loss for the twelve months ended months ended December 31, 2022 and 2021; (iii) Consolidated Statements of Stockholders’ Deficit for the twelve months ended months ended December 31, 2022 and 2021; (iv) Consolidated Statements of Cash Flows for the twelve months ended December 31, 2022 and 2021; and (v) Notes to Consolidated Financial Statements. | | | | | | |
| 104 | | The cover page from our Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL (included as Exhibit 101). | | | | | | |
1.We have omitted certain schedules and exhibits to these agreements in accordance with item 601(b)(2) of Regulation S-K. We will furnish a copy of any omitted schedule and/or exhibit to the SEC upon request.
2.Management Contract or Compensation Plan or Arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | |
| | | | REMARK HOLDINGS, INC. |
| | | | |
| Date: | March 31, 2021April 17, 2023 | By: | | /s/ Kai-Shing Tao |
| | | | Kai-Shing Tao |
| | | | Chief Executive Officer and Chairman |
| | | | (principal executive officer, principal financial officer and principal accounting officer) |
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Kai-Shing Tao, with full power
of substitution and resubstitution and full power to act, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this annual report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Name | | Title | | Date |
| | | | |
| /s/ Kai-Shing Tao | | | | |
| Kai-Shing Tao | | Chief Executive Officer and Chairman
(principal executive officer, principal financial officer and principal accounting officer) | | March 31, 2021April 17, 2023 |
| | | |
| | | | |
| /s/ Theodore Botts | | | | |
| Theodore Botts | | Director | | March 31, 2021April 17, 2023 |
| | | | |
| | | | |
| /s/ Brett Ratner | | | | |
| Brett Ratner | | Director | | March 31, 2021April 17, 2023 |
| | | | |
| | | | |
| /s/ Elizabeth Xu | | | | |
| Elizabeth Xu | | Director | | March 31, 2021April 17, 2023 |
| | | | |
| | | | |
| /s/ Daniel Stein | | | | |
| Daniel Stein | | Director | | March 31, 2021April 17, 2023 |
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Remark Holdings, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Remark Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2020,2022 and 2021, the related consolidated statements of operations, and comprehensive loss, stockholders’ deficit,equity (deficit), and cash flows for the yearyears then ended, December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020,2022 and 2021, and the results of its operations and its cash flows for the yearyears then ended, December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and negative cash flows from operating activities and has a negative working capital and a stockholders’ deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1.1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditaudits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Accounts receivable in China
As described further in Note 4 and Note 6 to the consolidated financial statements, the Company has $5.8gross receivables of $7.2 million in accounts receivable from customers in China,China. The Company recorded an allowance for doubtful accounts of which $1.4 million are past due based on their original credit terms. As of December 31, 2020, the Company$4.1
recorded an allowance for doubtful accounts of $1 million for these receivables.receivables, resulting in net accounts receivable of $3.1 million as of December 31, 2022. A majoritysignificant portion of the China accounts receivable are from sales to the Company’s China Mobile or its affiliates,Business Partner which represented 70%represented 36% of suchsuch receivables at December 31, 2020, with the balance due from local school districts or other government agencies.2022. The Company is actively working with China Mobile and the otherthese customers to arrange payment of the past due balances, and management expects to collect the net remaining balance outstanding of these receivables.
We identified the realization of these receivablesreceivables as a critical audit matter because a high degree of auditor judgment was required to evaluate various qualitative factors used in the Company’s evaluation of the realization of this receivable,these receivables, including economic and business conditions in China, current operations of the customer, the financial viability and reputation of the China MobileBusiness Partner and other customers, and the past collection history with customers.
Our audit procedures related to the realization of this receivablethese receivables included the following, among others:
•We evaluated the reasonableness of management’s methodology to determine its allowance for doubtful accounts, including testing and assessing for reasonableness the Company’s key inputs and assumptions used to estimate the realization of the receivables.
•We obtained and read operational communications, to the extent available, between the Company and China Mobile during calendar 2020 and 2021. We also obtained evidence of Company inquiries with the customer to collect the receivable and the customer responses.
•We confirmed with customers, or performed other procedures, to ensure that the Company’s performance obligations related to the outstanding receivablereceivables had been met including delivery and acceptance by the customer as of December 31, 2020.2022.
•We examined collections received by the Company subsequent to year end on certain of these receivables, and for those amounts yet uncollected, we verified past collection history with the customers. We also considered the viability of the customercustomers given their size and reputation, or relationship to government entity.reputation.
•We compared the Company’s historical transactions with its customers to assess the Company’s ability to accurately forecast collections. We also considered the traditional payment patterns and customs in China.
•We developed an independent expectation of the accounts receivable reserve and compared our independent expectation to the amount recorded in the financial statements.
Marketing AgreementDeferred Costs
As described further in Note 158 to the consolidated financial statements, during 2020 deferred cost of revenue at December 31, 2022 totaled $7.5 million and represents amounts the Company madehas paid in advance to a loancertain vendor providing services in relation to various revenue projects in China. The cost of $1.5 million to an unrelated entity that allows this entity to request additional loan distributions up to an aggregate loan amount of approximately $5.1 million. The business purpose for the loan was to allowservices provided are deferred and recorded as a prepaid asset until as such time as the other entity to purchase and modify hardware to integrate with the Company’s software and market such integrated product to potential customers. The Company is in the process of formalizing a more formal business relationship with this entity. The Company has determined that advancescompleted its performance obligation under the loan agreement were in essence marketingcontract, at which point the accumulated costs will be recognized as realizabilitycost of the loan was uncertain given the lack of formalized business relationship with the entitysales, and the nature of the use of funds. Wrelated revenue will be recorded.e We identified the recordingexistence and realization of this advance as a marketing costthese assets as a critical audit matter because a high degree of auditor judgment was required to evaluate various qualitative factors used in the Company’s evaluation of the existence and realization of this advance.the assets, including economic and business conditions in China, the impact of Covid 19 related lockdowns, and assessment of the vendor’s ability to perform the services when required.
The primaryOur audit procedures we performedrelated to addressthe realization of this critical audit matterasset included the following, among others:
•We inspectedobtained an understanding of Managements policy and process for assessing the loan agreementexistence and relevant documentation and confirmed with the other entity.realization of these assets.
•We tracedexamined the distribution of funds payments madeunderlying contracts related to the other entity.
•We evaluated the Company’s conclusions regarding the application of relevant accounting guidance for the accounting for the advance, including assessing the reasonableness of the significant qualitative assumptions used by the Companyprojects in determining the appropriate accounting such as assumptions related to realization of the amount, use of funds, and nature of the business relationship with the other entity.progress.
•We tested the accuracyexistence of the deferred costs through tracing cash payment and completenessby direct confirmation with the vendor.
•We obtained, examined, and assessed for reasonableness the Company’s schedule for final implementation of data used by the Company in its evaluation.future revenue projects including corroborating key terms with the vendor.
We have served as the Company’s auditor since 2020.
/s/ Weinberg & Company
Weinberg & Company, P.A.
Los Angeles, California
March 31, 2021April 17, 2023
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Remark Holdings, Inc.
Las Vegas, Nevada
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Remark Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and negative cash flows from operating activities and has a negative working capital and a stockholders’ deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. As of December 31, 2019, the Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Company’s auditor from 2011 until 2020.
/s/ Cherry Bekaert LLP
Atlanta, Georgia
May 29, 2020
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except share amounts and par values)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| | | |
| | | |
| Assets | | | |
| Cash | $ | 52 | | | $ | 14,187 | |
| Trade accounts receivable, net | 3,091 | | | 10,267 | |
| Inventory, net | 308 | | | 1,346 | |
| Investment in marketable securities | — | | | 42,349 | |
| Deferred cost of revenue | 7,463 | | | 589 | |
| Prepaid expense and other current assets | 1,374 | | | 5,774 | |
| Total current assets | 12,288 | | | 74,512 | |
| Property and equipment, net | 1,699 | | | 357 | |
| Operating lease assets | 180 | | | 194 | |
| | | |
| Other long-term assets | 269 | | | 440 | |
| Total assets | $ | 14,436 | | | $ | 75,503 | |
| Liabilities | | | |
| Accounts payable | $ | 9,602 | | | $ | 10,094 | |
| Advances from related parties | 1,174 | | | — | |
| Liability related to convertible debenture | 1,892 | | | — | |
| Accrued expense and other current liabilities | 7,222 | | | 5,963 | |
| Contract liability | 308 | | | 576 | |
| Notes payable, net of unamortized discount and debt issuance cost of $0 and $2,189 at December 31, 2022 and 2021, respectively | 14,607 | | | 27,811 | |
| Total current liabilities | 34,805 | | | 44,444 | |
| | | |
| Operating lease liabilities, long-term | 56 | | | 25 | |
| | | |
| Total liabilities | 34,861 | | | 44,469 | |
| | | |
| Commitments and contingencies | | | |
| | | |
| Stockholders’ Equity (Deficit) | | | |
| Preferred stock, $0.001 par value; 1,000,000 shares authorized; zero issued | — | | | — | |
| Common stock, $0.001 par value; 175,000,000 shares authorized; 11,539,564 and 10,515,777 shares issued and outstanding at December 31, 2022 and 2021, respectively | 12 | | | 11 | |
| Additional paid-in-capital | 368,945 | | | 364,333 | |
| Accumulated other comprehensive loss | (859) | | | (270) | |
| Accumulated deficit | (388,523) | | | (333,040) | |
| Total stockholders’ equity (deficit) | (20,425) | | | 31,034 | |
| Total liabilities and stockholders’ equity (deficit) | $ | 14,436 | | | $ | 75,503 | |
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| | | |
| | | |
| Assets | | | |
| Cash and cash equivalents (includes VIE of $278 and $49, respectively) | $ | 854 | | | $ | 272 | |
| Trade accounts receivable, net (includes VIE of $4,850 and $1,862, respectively) | 5,027 | | | 1,964 | |
| Inventory (includes VIE of $112) | 874 | | | 0 | |
| Prepaid expense and other current assets (includes VIE of $248 and $4,159, respectively) | 2,043 | | | 4,623 | |
| | | |
| | | |
| Total current assets | 8,798 | | | 6,859 | |
| | | |
| Property and equipment, net (includes VIE of $43 and $222, respectively) | 321 | | | 341 | |
| Operating lease assets (includes VIE of $281 and $189, respectively) | 492 | | | 4,359 | |
| Investments in unconsolidated affiliates | 1,030 | | | 1,935 | |
| Intangibles, net (includes VIE of $27, respectively) | 0 | | | 509 | |
| Other long-term assets (includes VIE of $68 and $29, respectively) | 670 | | | 824 | |
| Total assets | $ | 11,311 | | | $ | 14,827 | |
| Liabilities | | | |
| Accounts payable (includes VIE of $3,655 and $2,187, respectively) | $ | 8,589 | | | $ | 8,126 | |
| Accrued expense and other current liabilities (includes VIE of $3,782 and $8,821, respectively) | 6,660 | | | 14,326 | |
| Contract liability (includes VIE of $147 and $201, respectively) | 310 | | | 313 | |
| | | |
| Note payable | 1,500 | | | 3,000 | |
| Current maturities of long-term debt, net of unamortized discount and debt issuance cost | 0 | | | 12,025 | |
| | | |
| Total current liabilities | 17,059 | | | 37,790 | |
| Operating lease liabilities, long-term (includes VIE of $79 and $75, respectively) | 194 | | | 4,650 | |
| Warrant liability | 1,725 | | | 115 | |
| | | |
| Long - term debt, net | 1,425 | | | 0 | |
| | | |
| Total liabilities | 20,403 | | | 42,555 | |
| | | |
| Commitments and contingencies | 0 | | 0 |
| | | |
| Stockholders’ Deficit | | | |
| Preferred stock, $0.001 par value; 1,000,000 shares authorized; 0 issued | 0 | | | 0 | |
| Common stock, $0.001 par value; 100,000,000 shares authorized: 99,505,041 and 51,055,159 shares issued and outstanding; each at December 31, 2020 and 2019, respectively | 100 | | | 51 | |
| Additional paid-in-capital | 351,546 | | | 319,275 | |
| Accumulated other comprehensive loss | (226) | | | (227) | |
| Accumulated deficit | (360,512) | | | (346,827) | |
| Total stockholders’ deficit | (9,092) | | | (27,728) | |
| Total liabilities and stockholders’ deficit | $ | 11,311 | | | $ | 14,827 | |
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(dollars in thousands, except per share amounts)
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 |
Revenue, including amounts from China Business Partner (See Note 19) | | | | | $ | 11,666 | | | $ | 15,990 | |
| Cost and expense | | | | | | | |
| Cost of revenue (excluding depreciation and amortization) | | | | | 11,331 | | | 11,455 | |
Sales and marketing1 | | | | | 971 | | | 971 | |
| Recovery of marketing expense - China Business Partner activity | | | | | — | | | (1,530) | |
Technology and development1 | | | | | 2,101 | | | 4,692 | |
General and administrative1 | | | | | 18,399 | | | 14,120 | |
| Depreciation and amortization | | | | | 166 | | | 191 | |
| | | | | | | |
| | | | | | | |
| Total cost and expense | | | | | 32,968 | | | 29,899 | |
| Operating loss | | | | | (21,302) | | | (13,909) | |
| Other income (expense) | | | | | | | |
| Interest expense | | | | | (6,073) | | | (2,308) | |
| Finance cost on liability related to convertible debenture | | | | | (1,422) | | | — | |
| | | | | | | |
| Change in fair value of warrant liability | | | | | — | | | 123 | |
| Gain (loss) on investment | | | | | (26,356) | | | 43,642 | |
| Gain on debt extinguishment | | | | | — | | | 425 | |
| Other loss, net | | | | | (339) | | | (492) | |
| Total other income (expense), net | | | | | (34,190) | | | 41,390 | |
| Income (loss) from before income taxes | | | | | (55,492) | | | 27,481 | |
| Benefit from (provision for) income taxes | | | | | 9 | | | (9) | |
| Net income (loss) | | | | | $ | (55,483) | | | $ | 27,472 | |
| Other comprehensive loss | | | | | | | |
| Foreign currency translation adjustments | | | | | (589) | | | (44) | |
| Comprehensive income (loss) | | | | | $ | (56,072) | | | $ | 27,428 | |
| | | | | | | |
| Weighted-average shares outstanding, basic | | | | | 10,630,771 | | | 10,136,210 | |
| Weighted-average shares outstanding, diluted | | | | | 10,630,771 | | | 10,171,924 | |
| | | | | | | |
| Net income (loss) per share, basic | | | | | $ | (5.22) | | | $ | 2.71 | |
| Net income (loss) per share, diluted | | | | | $ | (5.22) | | | $ | 2.70 | |
| | | | | | | |
1 Includes share-based compensation as follows: | | | | | | | |
| Sales and marketing | | | | | $ | 3 | | | $ | 147 | |
| Technology and development | | | | | (267) | | | 293 | |
| General and administrative | | | | | 1,961 | | | 3,620 | |
| | | | | | | |
See Notes to Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive LossStockholders’ Equity (Deficit)
(dollars in thousands, except per share amounts)number of shares)
| | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, |
| | | |
| | | | | 2020 | | 2019 |
| Revenue, net | | | | | $ | 10,145 | | | $ | 5,020 | |
| Cost and Expense | | | | | | | |
| Cost of revenue (excluding depreciation and amortization) | | | | | 6,422 | | | 3,514 | |
Sales and marketing 1 | | | | | 3,378 | | | 3,003 | |
Technology and development 1 | | | | | 4,142 | | | 3,573 | |
General and administrative 1 | | | | | 9,368 | | | 14,174 | |
| Depreciation and amortization | | | | | 308 | | | 982 | |
| Impairments | | | | | 772 | | | 2,522 | |
| Other operating expense | | | | | 0 | | | 6 | |
| Total expense | | | | | 24,390 | | | 27,774 | |
| Operating loss from continuing operations | | | | | (14,245) | | | (22,754) | |
| Other income (expense) | | | | | | | |
| Interest expense | | | | | (1,342) | | | (1,876) | |
| Other income, net | | | | | 0 | | | 530 | |
| Gain on lease termination | | | | | 3,582 | | | 0 | |
| | | | | | | |
| Change in fair value of warrant liability | | | | | (1,610) | | | 1,268 | |
| Other loss | | | | | (70) | | | (172) | |
| Total other income (expense), net | | | | | 560 | | | (250) | |
| | | | | | | |
| | | | | | | |
| Loss from continuing operations | | | | | (13,685) | | | (23,004) | |
| Loss from discontinued operations, net of tax | | | | | 0 | | | (2,610) | |
| Net loss | | | | | $ | (13,685) | | | $ | (25,614) | |
| Other comprehensive income (loss) | | | | | | | |
| Foreign currency translation adjustments | | | | | 1 | | | (259) | |
| Comprehensive loss | | | | | $ | (13,684) | | | $ | (25,873) | |
| | | | | | | |
| Weighted-average shares outstanding, basic and diluted | | | | | 85,578 | | | 44,432 | |
| | | | | | | |
| Net loss per share, basic and diluted | | | | | | | |
| Continuing operations | | | | | $ | (0.16) | | | $ | (0.52) | |
| Discontinued operations | | | | | 0 | | | (0.06) | |
| Consolidated | | | | | $ | (0.16) | | | $ | (0.58) | |
| | | | | | | |
1 Includes share-based compensation as follows: | | | | | | | |
| Sales and marketing | | | | | $ | 164 | | | $ | 24 | |
| Technology and development | | | | | 484 | | | 70 | |
| General and administrative | | | | | 149 | | | 225 | |
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| Common Stock Shares | | Common Stock Par Value | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total |
| Balance at December 31, 2020 | 9,950,504 | | | 100 | | 351,546 | | | (226) | | | (360,512) | | | $ | (9,092) | |
| Adjustment for reverse stock split | | | (94) | | | 94 | | | | | | | — | |
| Net income | — | | | — | | | — | | | — | | | 27,472 | | | 27,472 | |
| Share-based compensation | — | | | — | | | 4,300 | | | — | | | — | | | 4,300 | |
| Common stock and stock warrants issued for cash | 423,729 | | | 4 | | | 4,610 | | | — | | | — | | | 4,614 | |
| Equity instrument exercises | 54,795 | | | — | | | 1,077 | | | — | | | — | | | 1,077 | |
| Common stock issuance upon note payable conversion | 87,649 | | | 1 | | | 1,104 | | | — | | | | | 1,105 | |
| Reclassification of warrant liability to equity | — | | | — | | | 1,602 | | | — | | | | | 1,602 | |
| Foreign currency translation | — | | | — | | | — | | | (44) | | | | | (44) | |
| Other | (900) | | | — | | | — | | | — | | | — | | | — | |
| Balance at December 31, 2021 | 10,515,777 | | | 11 | | 364,333 | | | (270) | | | (333,040) | | | 31,034 | |
| Net loss | — | | | — | | | — | | | — | | | (55,483) | | | (55,483) | |
| Share-based compensation | — | | | — | | | 2,104 | | | — | | | — | | | 2,104 | |
| Common stock issued as service compensation | 125,000 | | | — | | | 500 | | | — | | | — | | | 500 | |
| Common stock issuance upon note payable conversion | 898,854 | | | 1 | | | 2,003 | | | — | | | — | | | 2,004 | |
| Foreign currency translation | — | | | — | | | — | | | (589) | | | — | | | (589) | |
| Adjustment for reverse stock split | (67) | | | — | | | 5 | | | — | | | — | | | 5 | |
| Balance at December 31, 2022 | 11,539,564 | | | $ | 12 | | | $ | 368,945 | | | $ | (859) | | | $ | (388,523) | | | $ | (20,425) | |
| | | | | | | | | | | |
See Notes to Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ DeficitCash Flows
(dollars in thousands, except number of shares)thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| Common Stock Shares | | Common Stock Par Value | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total |
| Balance at December 31, 2018 | 39,053,312 | | | $ | 39 | | | $ | 308,018 | | | $ | 32 | | | $ | (321,213) | | | $ | (13,124) | |
| Net loss | — | | | — | | | — | | | — | | | (25,614) | | | (25,614) | |
| Share-based compensation | — | | | — | | | 425 | | | — | | | — | | | 425 | |
| Common stock issuances | 11,999,597 | | | 12 | | | 10,828 | | | — | | | — | | | 10,840 | |
| Equity instrument exercises | 2,250 | | | — | | | 4 | | | — | | | — | | | 4 | |
| Other | — | | | — | | | — | | | (259) | | | — | | | (259) | |
| Balance at December 31, 2019 | 51,055,159 | | | 51 | | 319,275 | | | (227) | | | (346,827) | | | (27,728) | |
| Net loss | — | | | — | | | — | | | — | | | (13,685) | | | (13,685) | |
| Share-based compensation | — | | | — | | | 160 | | | — | | | — | | | 160 | |
| Common stock issuances | 48,298,893 | | | 48 | | | 31,982 | | | — | | | — | | | 32,030 | |
| Equity instrument exercises | 150,989 | | | 1 | | | 129 | | | — | | | — | | | 130 | |
| Other | — | | | — | | | — | | | 1 | | | 0 | | | 1 | |
| Balance at December 31, 2020 | 99,505,041 | | | $ | 100 | | | $ | 351,546 | | | $ | (226) | | | $ | (360,512) | | | $ | (9,092) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Cash flows from operating activities: | | | |
| Net income (loss) | $ | (55,483) | | | $ | 27,472 | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Change in fair value of warrant liability | — | | | (123) | |
| Depreciation, amortization and impairments | 166 | | | 191 | |
| Share-based compensation | 1,697 | | | 4,060 | |
| Amortization of debt issuance costs and discount | 2,189 | | | 880 | |
| Cost of extending note payable | 283 | | | — | |
| Finance cost on liability related to convertible debenture | 1,422 | | | — | |
| Stock issuances for services performed | 500 | | | — | |
| | | |
| Loss (gain) on investment | 26,356 | | | (43,642) | |
| Gain on debt extinguishment | — | | | (425) | |
| | | |
| | | |
| Finance cost of converting note payable to common stock | — | | | 44 | |
| Provision for doubtful accounts | 2,882 | | | 297 | |
| Other | (182) | | | 30 | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | 3,650 | | | (5,733) | |
| Inventory | 1,033 | | | (473) | |
| Deferred cost of revenue | (6,874) | | | (488) | |
| Prepaid expense and other assets | 4,213 | | | (3,632) | |
| Operating lease assets | 1 | | | 293 | |
| Accounts payable, accrued expense and other liabilities | 1,745 | | | 967 | |
| Contract liability | (251) | | | 277 | |
| Operating lease liabilities | 37 | | | (169) | |
| Net cash used in operating activities | (16,616) | | | (20,174) | |
| Cash flows from investing activities: | | | |
| Proceeds from sale of investment | 6,332 | | | 2,322 | |
| Purchases of property, equipment and software | (448) | | | (223) | |
| Payment of amounts capitalized to software in progress | (1,063) | | | — | |
| Net cash provided by investing activities | 4,821 | | | 2,099 | |
| Cash flows from financing activities: | | | |
| Proceeds from issuance of common stock, net | — | | | 5,692 | |
| Proceeds from debt issuance | 2,703 | | | 32,216 | |
| Advances from related parties | 3,256 | | | — | |
| Repayments of debt | (6,217) | | | (6,500) | |
| Repayment of advances from related parties | (2,082) | | | — | |
| | | |
| Net cash provided by (used in) financing activities | (2,340) | | | 31,408 | |
| Net change in cash | (14,135) | | | 13,333 | |
| Cash: | | | |
| Beginning of period | 14,187 | | | 854 | |
| End of period | $ | 52 | | | $ | 14,187 | |
| | | |
| Supplemental cash flow information: | | | |
| Cash paid for interest | $ | 3,238 | | | $ | 1,414 | |
| | | |
| Supplemental schedule of non-cash investing and financing activities: | | | |
| Issuance of common stock upon note payable conversion | $ | 2,804 | | | $ | 1,105 | |
| Transfer of marketable securities to partially settle debt | $ | 9,662 | | | $ | — | |
| Reclassification of warrant liability to equity | $ | — | | | $ | 1,602 | |
| Reclassification of investment to marketable securities | $ | — | | | $ | 1,030 | |
| | | |
See Notes to Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
| | | | | | | | | | | |
| Year Ended December 31, |
| |
| 2020 | | 2019 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (13,685) | | | $ | (25,614) | |
| Loss from discontinued operations | 0 | | | 2,610 | |
| Loss from continuing operations | (13,685) | | | (23,004) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Change in fair value of warrant liability | 1,610 | | | (1,268) | |
| Depreciation and amortization | 308 | | | 982 | |
| Share-based compensation | 797 | | | 319 | |
| Amortization of debt issuance costs and discount | 0 | | | 1,436 | |
| | | |
| Gain on lease termination | (3,582) | | | 0 | |
| Loss on disposal of long-lived assets | 77 | | | 150 | |
| Loss on impairment of intangible assets, including goodwill | 772 | | | 2,522 | |
| Other | 269 | | | 745 | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | (2,825) | | | 3,752 | |
| Prepaid expense and other assets | (779) | | | 1,604 | |
| Operating lease assets | 73 | | | 524 | |
| Accounts payable, accrued expense and other liabilities | (920) | | | (1,413) | |
| Contract liability | (27) | | | 209 | |
| Operating lease liabilities | (135) | | | 813 | |
| Net cash used in continuing operating activities | (18,047) | | | (12,629) | |
| Net cash used in discontinued operating activities | 0 | | | (7,159) | |
| Net cash used in operating activities | (18,047) | | | (19,788) | |
| Cash flows from investing activities: | | | |
| | | |
| Purchases of property, equipment and software | (290) | | | (8) | |
| Payment of payroll costs capitalized to software in progress | 0 | | | (127) | |
| Proceeds from sale of business | 0 | | | 30,000 | |
| | | |
| Net cash provided by (used in) continuing investing activities | (290) | | | 29,865 | |
| Net cash used in discontinued investing activities | 0 | | | (18,396) | |
| Net cash provided by (used in) investing activities | (290) | | | 11,469 | |
| Cash flows from financing activities: | | | |
| Proceeds from issuance of common stock, net | 32,135 | | | 10,844 | |
| Proceeds from debt issuance | 1,425 | | | 0 | |
| Payment of debt issuance cost | 0 | | | (2,275) | |
| Repayments of debt | (13,781) | | | (25,526) | |
| Payment of contingent consideration related to business acquisitions | (860) | | | 0 | |
| Net cash provided by (used in) financing activities | 18,919 | | | (16,957) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 582 | | | (25,276) | |
| Cash, cash equivalents and restricted cash: | | | |
| Beginning of period, including cash in disposal group | 272 | | | 25,548 | |
| | | |
| End of period | $ | 854 | | | $ | 272 | |
| | | |
| Supplemental cash flow information: | | | |
| Cash paid for interest | $ | 965 | | | $ | 2,211 | |
| | | |
| | | |
| Supplemental schedule of non-cash activities: | | | |
| Addition of interest to debt principal | $ | 0 | | | $ | 948 | |
| Increase in loan payable | $ | 0 | | | $ | 1,103 | |
| Offsetting of other receivables against other current liabilities | $ | 3,060 | | | $ | 0 | |
See Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND BUSINESS
Organization and Business
Remark Holdings, Inc. and its subsidiaries (“Remark”, “we”, “us”, or “our”) constitute a diversified global technology business with leading artificial intelligence (“AI”) and data-analytics solutions, as well as a portfolio of digital media properties. The common stock of Remark Holdings, Inc. is listed on the Nasdaq Capital Market under the ticker symbol MARK.
We primarily sell AI-based products and services. We currently recognize substantially all of our revenue from China, with additional revenue from sales in the U.S.
On December 21, 2022, we effected a 1-for-10 reverse split of our common stock (the “Reverse Split”). All references made to share or per share amounts in these financial statements have been retroactively adjusted to reflect the effects of the Reverse Split.
Corporate Structure
We are a holding company incorporated in Delaware and not a Chinese operating company. As a holding company, we conduct most of our operations through our subsidiaries, each of which is wholly owned. We have historically conducted a significant part of our operations through contractual arrangements between our wholly-foreign-owned enterprise (“WFOE”) and certain variable interest entities (“VIEs”) based in China to address challenges resulting from laws, policies and practices that may disfavor foreign-owned entities that operate within industries deemed sensitive by the Chinese government. We were the primary beneficiary of the VIEs because the contractual arrangements governing the relationship between the VIEs and our WFOE, which included an exclusive call option agreement, exclusive business cooperation agreement, a proxy agreement and an equity pledge agreement, enabled us to (i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive call option to purchase, at any time, all or part of the equity interests in and/or assets of the VIEs to the extent permitted by Chinese laws. Because we were the primary beneficiary of the VIEs, we consolidated the financial results of the VIEs in our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”).
We terminated all of the contractual arrangements between the WFOE and the VIEs and exercised our rights under the exclusive call option agreements between the WFOE and the VIEs such that, effective as of September 19, 2022, we obtained 100% of the equity ownership of the entities we formerly consolidated as VIEs and which we now consolidate as wholly-owned subsidiaries.
The following diagram illustrates our corporate structure, including our significant subsidiaries, as of the date of this Form 10-K. The diagram omits certain entities which are immaterial to our results of operations and financial condition.
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION, BUSINESS AND OTHER ITEMS
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 of AI-based products and services in the U.S., under our Remark AI brand, and in China under the KanKan brand.
Economic and political risks
Our operations in ChinaWe are subject to special considerationscertain legal and significant risks not typically associated with companies in the United States, includingoperational risks associated with among others, the political, economic and legal environment and foreign currency exchange. Our results may be adversely affected by changeshaving a significant portion of our operations in the political conditions in China, and by changes in governmental policies with respect toChina. Chinese laws and regulations anti-inflationary measures, currency conversion, remittances abroad,governing our current business operations, including the enforcement of such laws and ratesregulations, are sometimes vague and methodsuncertain and can change quickly with little advance notice. The Chinese government may intervene in or influence the operations of taxation.
COVID-19
Our consolidated financial statements forour China-based subsidiaries at any time and may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the year ended December 31, 2020 were impactedvalue of our securities. In addition, any actions by the effects of the global outbreak of novel strains of coronavirus, Chinese government to exert more oversight and control over offerings that are conducted overseas and/or COVID-19, as national and local governmental authoritiesforeign investment in China and the U.S., where we operate, placed significant restrictions on travel and other activities within their respective countries, leading to extended business closures. The restrictions and resulting business closures limitedChina-based issuers could significantly limit or completely hinder 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 continuing impact of the pandemic on our business and financial results will depend largely on future developments, including how new COVID-19 variants affect the duration and severity of the outbreak, the length of any new or continuing travel restrictions and business closures imposed 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 changes rapidly, and additional impacts of which we are not currently aware may arise, underscored by the somewhat recent surge in cases in the U.S and the newly-discovered COVID-19 variants. We are closely monitoring developments in the U.S. and in China and are continually assessing the potential impact on our business.
To mitigate the potential material negative effects that COVID-19 may have on our business and to do our part to provide customers with the means to limit the spread of COVID-19, we have 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 to provide customers with the ability to scan crowdsoffer or continue to offer our securities to investors and areascause the value of high foot traffic for indications that certain persons may require secondary screening. We sell such products primarily in the U.S., as well as in other countries.
Going Concern
During the year ended December 31, 2020, and in each fiscal year since our inception, we have incurred net losses which have resulted in an accumulated deficit of $360.5 million as of December 31, 2020. Additionally, our operations have historically used more cash than they have provided. Net cash used in operating activities was $18.0 million during the year ended December 31, 2020. As of December 31, 2020, our cash and cash equivalents balance was $0.9 million, and we had a negative working capital balance of $8.3 million and total stockholders’ deficit of $9.1 million.
significantly decline or become worthless. In recent years, the Chinese government adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to the use of variable interest entities, cybersecurity, data security, export control and anti-monopoly concerns. As of the date of this Form 10-K, we have neither been involved in any investigations on cybersecurity review initiated by any Chinese regulatory authority, nor received any inquiry, notice or sanction. As of the date of this Form 10-K, no relevant laws or regulations in China explicitly require us to seek approval from the China Securities Regulatory Commission (the “CSRC”) for any securities listing. As of the date of this Form 10-K, we have not received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other Chinese governmental authorities relating to securities listings. However, since these statements and regulatory actions are newly published, official guidance and related implementation rules have not all been issued. It is highly uncertain what potential impact such modified or new laws and regulations will have on our ability to conduct our business, accept investments or list or maintain a listing on a U.S. or foreign exchange.
As of the date of this Form 10-K, we are not required to seek permissions from the CSRC, the Cyberspace Administration of China (the “CAC”), or any other entity that is required to approve our operations in China. Nevertheless, Chinese regulatory authorities may in the future promulgate laws, regulations or implement rules that require us or our subsidiaries to obtain permissions from such regulatory authorities to approve our operations or any securities listing.
Holding Foreign Companies Accountable Act
The Holding Foreign Companies Accountable Act (the “HFCA Act”) was enacted on December 18, 2020. The HFCA Act states that if the Securities and Exchange Commission (the “SEC”) determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the Public Company Accounting Oversight Board (the “PCAOB”) for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market in the United States. On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction. The Consolidated Appropriations Act, 2023, which was signed into law on December 29, 2022, amended the HFCA Act to reduce the number of consecutive non-inspection years required to trigger the trading prohibition under the HFCA Act from three years to two years.
On December 16, 2021, the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by Chinese and Hong Kong authorities in those jurisdictions.
On August 26, 2022, the CSRC, the Ministry of Finance of the PRC, and the PCAOB signed a Statement of Protocol, taking the first step toward opening access for the PCAOB to completely inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong.
On December 15, 2022, the PCAOB vacated its 2021 determination that the positions taken by authorities in mainland China and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions. In view of the PCAOB’s decision to vacate its 2021 determination and until such time as the PCAOB issues any new adverse determination, the SEC has stated that there are no issuers at risk of having their securities subject to a trading prohibition under the HFCA Act. Each year, the PCAOB will reassess its determinations on whether it can inspect and investigation completely audit firms in China, and if, in the future, the PCAOB determines it cannot do so, or if Chinese authorities do not allow the PCAOB complete access for inspections and investigations for two consecutive years, companies engaging China-based public accounting firms would be delisted pursuant to the HFCA Act.
Our auditor, Weinberg & Company, an independent registered public accounting firm headquartered in the United States, is currently subject to PCAOB inspections and has been inspected by the PCAOB on a regular basis. However, if the PCAOB is unable to inspect the work papers of our accounting firm in the future, such lack of inspection could cause trading in our common stock to be prohibited under the HFCA Act, and as a result, an exchange may determine to delist our common stock. The delisting and the cessation of trading of our common stock, or the threat of our common stock being delisted and prohibited from being traded, may materially and adversely affect the value of our common stock.
Transfer of Cash or Assets
Dividend Distributions
As of the date of this Form 10-K, none of our subsidiaries have made any dividends or distributions to the parent company.
We have never declared or paid dividends or distributions on our common equity. We currently intend to retain all available funds and any future consolidated earnings to fund our operations and continue the development and growth of our business; therefore, we do not anticipate paying any cash dividends.
Under Delaware law, a Delaware corporation’s ability to pay cash dividends on its capital stock requires the corporation to have either net profits or positive net assets (total assets less total liabilities) over its capital. If we determine to pay dividends on any of our common stock in the future, as a holding company, we may rely on dividends and other distributions on equity from our subsidiaries for cash requirements, including the funds necessary to pay dividends and other cash contributions to our stockholders.
Our WFOE’s ability to distribute dividends is based upon its distributable earnings. Current Chinese regulations permit our WFOE to pay dividends to its shareholder only out of its registered capital amount, if any, as determined in accordance with Chinese accounting standards and regulations, and then only after meeting the requirement regarding statutory reserve. If our WFOE incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Any limitation on the ability of our WFOE to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business. In addition, any cash dividends or distributions of assets by our WFOE to its stockholder are subject to a Chinese withholding tax of as much as 10%.
The Chinese government also imposes controls on the conversion of Chinese Renminbi (“RMB”) into foreign currencies and the remittance of currencies out of China. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. If we are unable to receive all of the revenues from our operations through our China-based subsidiaries, we may be unable to pay dividends on our common stock.
COVID-19
Our consolidated financial statements for the year ended December 31, 2022 were impacted by the effects of the COVID-19 pandemic. The response to COVID-19 will likely continue to adversely affect our business and financial results, as could economic and geopolitical conditions in some international regions, and we do not yet know what will be the ultimate effects on our business. The COVID-19 pandemic caused a broad shift towards remote working arrangements for many businesses worldwide and injected uncertainty and delay into decision-making processes for such businesses. Varying degrees of preventative measures are still in place in China and other parts of the world, including city-wide lockdowns, travel restrictions, closures of non-essential businesses and other quarantine measures. In particular, the preventative measures in China as a result of the Chinese government’s former “Zero-COVID” policy significantly limited the operational capabilities of our China-based subsidiaries. Many cities across large swaths of China were fully or partially locked down for weeks or even months, including economically significant regions such as Shanghai. Such lockdowns have had a material adverse impact on our business, including on the collection of our accounts receivable, and we expect them to continue to have a material adverse impact on our business until their imposition is ceased.
The full extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including resurgences and further spread of existing or new COVID-19 variants, the duration of any remaining preventative measures implemented by domestic and foreign governments, the impact on capital and financial markets and the related impact on the financial circumstances of our customers, all of which are highly uncertain and cannot be predicted. The pandemic-related situation continues to change rapidly, and additional impacts of which we are not currently aware may arise. We are closely monitoring worldwide developments and are continually assessing the potential impact on our business.
Going Concern
During the year ended December 31, 2022, and in each fiscal year since our inception, we have incurred operating losses which have resulted in a stockholders’ deficit as of December 31, 2022. Additionally, our operations have historically used more cash than they have provided. We did not make the required repayment of the outstanding loans under the Original Mudrick Loan Agreements by October 31, 2022, the maturity date, resulting in an event of default which was only cured subsequent to the balance sheet date. Net cash used in operating activities was $16.6 million during the year ended December 31, 2022. As of December 31, 2022, our cash balance was $0.1 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. TheOur independent registered public accounting firm, in its report on our consolidated financial statements for the year ended December 31, 2022, has also expressed substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that maymight result from our possible inability to continue as a going concern.the outcome of this uncertainty.
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.and data analytics offerings. 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-K. As a result, we are actively evaluating strategic alternatives including debt and equity financings and potential sales of investment assets or operating businesses. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for its stockholders, in case of equity financing.financings.
Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (in particular, in response toas a result of the COVID-19 pandemic)pandemic, global supply chain disruptions, inflation and other cost increases, and the geopolitical conflict in Ukraine), 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 March 31, 2022.June 30, 2023.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
We include all of our subsidiaries including the VIEs for which we are the primary beneficiary, in our consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.
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.
With regard to our investment in Sharecare, Inc. (“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. We use the equity method for equity investments in which we can exercise significant influence over the investee.
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, and long-term receivables, intangible assets, the useful livesdeferred cost of property and equipment,revenue, share-based compensation, the fair value of the warrant liability, deferred income taxes, and inventory reserve, among other items.
As of December 31, 2020, the
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 and cash equivalents
Our cash and cash equivalents consistconsists of funds held in bank accounts. Cash equivalents are highly-liquid investments with original maturities of three months or less, including money market funds.
We maintain cash balances in United States dollars (“USD”) and British pounds (“GBP”), while the VIEs maintain cash balances in USD, Chinese Renminbi (“RMB”), and Hong Kong dollars (“HKD”). The following table, reported in USD, disaggregates our cash balances by currency denomination (in thousands):
| | | | | December 31, |
| | | | | | | | | | | | | | 2022 | | 2021 |
| | | December 31,
2020 | | December 31, 2019 | |
| Cash denominated in: | Cash denominated in: | | | | | Cash denominated in: | | | | |
| USD | USD | | $ | 563 | | | $ | 216 | | USD | | $ | 11 | | | $ | 13,278 | |
| RMB | | RMB | | 19 | | | 259 | |
| GBP | | GBP | | 17 | | | 644 | |
| HKD | HKD | | 8 | | | 2 | | HKD | | 5 | | | 6 | |
| RMB | | 283 | | | 54 | | |
| Total cash | Total cash | | $ | 854 | | | $ | 272 | | Total cash | | $ | 52 | | | $ | 14,187 | |
We maintain substantially all of our USD-denominated cash at a U.SU.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 December 31, 2020,2022, we do not believe we have any significant concentrations of credit risk, although approximately $0.3 million of our USD-denominated cash balance exceeded the FDIC-insured limit.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 Chinaour non-U.S. subsidiaries to fund local operations. If, however, the USD is devalued significantly against the RMB, our cost to further developexpand our business in China could exceed original estimates.
Marketable Securities
Investment in marketable securities consisted of marketable equity securities. We classify marketable securities as current or noncurrent based on the nature of the securities and their availability for use in current operations. Marketable securities are stated at fair value with all realized and unrealized gains and losses recognized in our Statement of Operations. The realized and unrealized gains and losses on marketable securities are determined using the specific identification method and quoted prices in an active market.
Leases
We adopted Accounting Standards Codification Topic 842, Leases (“ASC 842”), as of January 1, 2019. When adopting ASC 842 we elected several practical expedients permitted under the transition guidance within ASC 842, which, among other things, allowed us to carry forward the historical lease classification and to avoid recording leases that had expired prior to the date of adoption. We also elected to combine the lease and non-lease components of our leases for office space (which represent the largest portion of our operating lease assets and liabilities) and not to record leases with initial terms of 12 months or less (short-term leases) on the balance sheet. We amortize the cost of short-term leases on a straight-line basis over the lease term.
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, marketable securities, receivables, prepaids and other current assets, accounts payable, accrued expense and other current liabilities, and short-term debt 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,subsidiaries, however, maintain their books and records in their RMB functional currency, while we have other subsidiaries with minimal activity which maintain their books and records in their HKD functional currency.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: | | | | | | | | | | | |
| 2020 | | 2019 |
| Exchange rates at December 31st: | | | |
| RMB:USD | 0.153 | | | 0.140 | |
| HKD:USD | 0.129 | | | 0.128 | |
| | | |
| Average exchange rate during the twelve months ended December 31st: | | | |
| RMB:USD | 0.143 | | | 0.146 | |
| | | | | | | | | | | |
| 2022 | | 2021 |
| Exchange rates at December 31st: | | | |
| GBP:USD | 1.209 | | | 1.351 | |
| RMB:USD | 0.145 | | | 0.157 | |
| HKD:USD | 0.128 | | | 0.128 | |
| | | |
| Average exchange rate during the twelve months ended December 31st: | | | |
| RMB:USD | 0.149 | | | 0.155 | |
We evaluate all of our agreements with customers to determine whether they qualify as contracts in scope of the current revenue guidance in GAAP. If an agreement qualifies as a contract in scope, we then identify the performance obligations in the contract, determine the transaction price of the contract, allocate such transaction price to the performance obligations in the contract and determine whether to recognize revenue when or as a performance obligation is satisfied.
We regularly review our customers’ financial positions to ensure that collectability of amount due from them is reasonably assured. If there is uncertainty related to the timing of collections from our customer, 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 collectability is probable.
We recognize revenue from warranty contracts on a straight-line basis over the period of the warranty.
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.
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 clientscustomers 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 collectability of consideration from the customer is probable.
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 amortizedincurred.
Weoffer extended warranties on our products for periods of one to three years. Revenue from these extended warranties is recognized on a straight-line basis over a period of less than one year if capitalized.the warranty contract term.
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 goodgoods 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.
Share-Based Compensation
For grants of restricted stock or restricted stock units, we measure fair value using the closing price of our stock on the measurement date, while we use the Black-Scholes-Merton option pricing model (the “BSM Model”) to estimate the fair value of stock options and similar instruments awarded.
The BSM Model requires the following inputs:
•Expected volatility of our stock price. We analyze the historical volatility of our stock price utilizing daily stock price returns, and we also review the stock price volatility of certain peers. Using the information developed from such analysis and our judgment, we estimate how volatile our stock price will be over the period we expect the stock options will remain outstanding.
•Risk-free interest rate. We estimate the risk-free interest rate using data from the Federal Reserve Treasury Constant Maturity Instruments H.15 Release (a table of rates downloaded from the Federal Reserve website) as of the valuation date for a security with a remaining term that approximates the period over which we expect the stock options will remain outstanding.
•Stock price, exercise price and expected term. We use an estimate of the fair value of our common stock on the measurement date, the exercise price of the option, and the period over which we expect the stock options will remain outstanding.
We do not currently issue dividends, but if we did so, then we would also include an estimated dividend rate as an input to the BSM model. Generally speaking, the BSM model tends to be most sensitive to changes in stock price, volatility or expected term.
We measure compensation expense as of the grant date for granted equity-classified instruments and as of the settlement date for granted liability-classified instruments (meaning that we re-measure compensation expense at each balance sheet date until the settlement date occurs).
Once we measure compensation expense, we recognize it over the requisite service period (generally the vesting period) of the grant, net of forfeitures as they occur.
Accounts Receivable
We regularly evaluate the collectability of trade receivable balances based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns. If we determine that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing, severe limitations on its operational capability as a result of COVID-19-related restrictions or other material events impacting its business, a specific reserve for bad debt will be recorded to reduce the related receivable to the amount expected to be recovered.
Income Taxes
We recognize deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) to account for the effects of temporary differences between the tax basis of an asset or liability and its amount as reported in our consolidated balance sheets, using enacted tax rates expected to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. Any effect on DTAs or DTLs resulting from a change in enacted tax rates is included in income during the period that includes the enactment date.
We reduce the carrying amounts of DTAs by a valuation allowance if, based upon all available evidence (both positive and negative), we determine that it is more likely than not that such DTAs will not be realizable. Such assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, our forecasts of future profitability, tax planning strategies, the duration of statutory carryforward periods, and our experience with the utilization of operating loss and tax credit carryforwards before expiration.
We apply a recognition threshold and measurement attribute related to uncertain tax positions taken or expected to be taken on our tax returns. We recognize a tax benefit for financial reporting of an uncertain income tax position when it has a greater than 50% likelihood of being sustained upon examination by the taxing authorities. We measure the tax benefit of an uncertain tax position based on the largest benefit that has a greater than 50% likelihood of being ultimately realized, including evaluation of settlements.
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. At December 31, 2022 and 2021, reserve for inventory was $2.2 million and $1.0 million, respectively.
Advertising Expense
Advertising expense is recorded during the period in which it is incurred. We incurreddid not incur a material amount of advertising expense during the years ended December 31, 2020 and 2019 of $0.2 million and $0.3 million, respectively.2022 or 2021.
Research and Development
Engineering cost is recorded as technology and development expense during the period in which it is incurred.
Product Warranties
Weoffer extended warranties on our products for periods of one to three years. To estimate our warranty cost, we use historical warranty claim experience and we then net such cost against the related product revenue. Warranty costs were not material for the years ended December 31, 20202022 and 20192021.
Property, Equipment and Software
We state property and equipment at cost and depreciate such assets using the straight-line method over the estimated useful lives of each asset category. For leasehold improvements, we determine amortization using the straight-line method over the shorter of the lease term or estimated useful life of the asset. We expense repairs and maintenance costs as incurred, while capitalizing betterments and capital improvements and depreciating such costs over the remaining useful life of the related asset.
We capitalize qualifying costs of computer software that we incur during the application development stage, as well as the cost of upgrades and enhancements that result in additional functionality, and we amortize such costs using the straight-line method over a period of three years, the expected period of the benefit.
Net LossIncome (Loss) per Share
We calculate basic net lossincome (loss) per share using the weighted-average number of common stock shares outstanding during the period. For the calculation of diluted net lossincome (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 yearyears ended December 31, 20202022 and 2019,2021, there were no reconciling items related to either the numerator ornumerators of the net income (loss) per share calculations. The following table presents a reconciliation of the denominator of the lossbasic net income (loss) per share calculation as their effect would have been anti-dilutive.to that of the diluted net income (loss) per share calculation (in thousands):
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 |
| Weighted-average shares outstanding, basic | | | | | 10,630,771 | | | 10,136,210 | |
| Incremental shares resulting from assumed exercises of in-the-money stock options | | | | | — | | | 35,714 | |
| Weighted-average shares outstanding, diluted | | | | | 10,630,771 | | | 10,171,924 | |
Securities which wouldmay have been anti-dilutive to aaffected the calculation of diluted earnings per share for the yearyears ended December 31, 20202022 and 20192021 if their effect had been dilutive include 9,942,3411,626,631 total options outstanding and 10,359,0791,435,471 outstanding out-of-the-money stock options, respectively, and 40,000 and 3,966,6131,011,441 outstanding stock warrants respectively.in both years.
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.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 1one operating segment.
Commitments and Contingencies
We record a liability for a loss contingency when we determine that it is probable that we have incurred such liability and we can reasonably estimate the amount.
Impairments
Long-Lived Assets Other Than Indefinite-Lived Intangible Assets
When events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, we evaluate long-lived assets for potential impairment, basing our testing method upon whether the assets are held for sale or held for use. For assets classified as held for sale, we recognize the asset at the lower of carrying value or fair market value less costs of disposal, as estimated based on comparable asset sales, offers received, or a discounted cash flow model. For assets held and used, we estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, we recognize an impairment loss for the difference between the carrying value of the asset and its fair value.
Indefinite-Lived Intangible Assets
In the fourth quarter of each fiscal year, we test indefinite-lived intangible assets for impairment. When testing for impairment, we first evaluate qualitative factors to determine whether events and circumstances indicate that, more likely than not, an indefinite-lived intangible asset is impaired. If, after evaluating the totality of events and circumstances and their potential effect on significant inputs to the fair value determination, we determine that, more likely than not, an indefinite-lived intangible asset is impaired, we then quantitatively test for impairment.
Investments
We routinely perform an assessment of our investments in Sharecare and in AIO (see Note 7) to determine if they are other-than-temporarily impaired. An investment is impaired when the fair value of the investment declines to an amount less than the cost or amortized cost of that investment. As part of our assessment process, we determine whether the impairment is temporary or other-than-temporary. We base our assessment on both quantitative criteria and qualitative information, considering a number of factors including, but not limited to how long the security has been impaired, the amount of the impairment, the financial condition and near-term prospects of the issuer, whether the issuer is current on contractually-obligated interest and principal payments, key corporate events pertaining to the issuer and whether the market decline was affected by macroeconomic conditions.
If we determine that an investment has incurred an other-than-temporary impairment, we permanently reduce the cost of the equity security to fair value and recognize an impairment charge in our consolidated statements of operations.
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.
Liabilities Related to Warrants Issued
We record certain common stock warrants we issued (see Note 5 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.SEC. 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.
NOTE 3. CONCENTRATIONS OF RISK
Revenue and Accounts Receivable
The disaggregation of revenue tables in Note 4 demonstrate the concentration in our revenue from certain products and the geographic concentration of our business. We also have a concentration in the volume of business we transacted with customers, as during the year ended December 31, 2020, customer A represented about 31%2022, two of our revenuecustomers represented 46% and customer B represented about 11%20%, respectively, of our revenue, while during the year ended December 31, 2019, customer C accounted for2021, three of our customers represented about 27%24%, 18% and 12%, respectively, of our revenue. At December 31, 2020, customer A represented approximately 38%2022, accounts receivable from three of our gross accounts receivable,customers represented about 23%, 16%, and 10%, respectively, while at December 31, 2019, customer D2021, accounts receivable from three of our customers represented about 31%25%, 24% and 10%, respectively.
Deferred Cost of Revenue
See Note 8 for a discussion of a risk concentration regarding our gross accounts receivable and customer E represented about 17%deferred cost of our gross accounts receivable.revenue.
Cost of Sales and Accounts Payable
The various hardware we purchase to fulfill our contracts with customers is not especially unique in nature. Based on our analysis, we believe that should any disruption in our current supply chain occur, a sufficient number of alternative vendors is available to us, at reasonably comparable specifications and price, such that we would not experience a material negative impact on our ability to procure the hardware we need to operate our business.
NOTE 4. REVENUE
We primarily sell AI-based products and services. In the U.S., that includehas included our Remark AI Thermal Kits and rPads, while in the U.S., as well as theChina we sell various customized products we sell in China based upon computer vision 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 of products and services (in thousands): | | | | | | | | | | | |
| Year Ended December 31, |
| Revenue by category | 2020 | | 2019 |
| AI-based products | 9,596 | | | 3,595 | |
| Other | 549 | | | 1,425 | |
| Revenue | $ | 10,145 | | | $ | 5,020 | |
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 |
AI-based products and services, including $5.4 million and $3.8 million, respectively, from China Business Partner (See Note 19) | | | | | $ | 10,964 | | | $ | 14,792 | |
| Other | | | | | 702 | | | 1,198 | |
| Revenue | | | | | $ | 11,666 | | | $ | 15,990 | |
The following table presents a disaggregation of our revenue by country (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| Revenue by country | 2020 | | 2019 |
| China | 7,876 | | | 3,595 | |
| United States | 2,269 | | | 1,425 | |
| | | |
| Revenue | $ | 10,145 | | | $ | 5,020 | |
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 |
| China | | | | | $ | 11,402 | | | $ | 12,218 | |
| United States | | | | | 264 | | | 3,772 | |
| | | | | | | |
| Revenue | | | | | $ | 11,666 | | | $ | 15,990 | |
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 year ended December 31, 2020,2022, our contract liability changed only as a result of routine business activity.
During the years ended December 31, 2022 and 2021, the amount of revenue we recognized approximately $0.3 million of revenue whichthat was included in the beginning balance of Contract liability at January 1, 2020, while during the comparable period of 2019, we did 0t recognize a material amount of revenue which was included in the beginning balance of Contract liability at January 1, 2019.not material.
Certain Agreements Related to AI-Based Product Sales
In December 2018, we completed 2 fully-integrated AI solutions for which we fully performed under the agreement and title to the product passed to our customer, so we recognized cost of revenue of $4.0 million; however, we did not recognize the
$4.6 million of revenue from such projects due to uncertainty regarding the timing of collection of amounts payable to us under the agreement. The uncertainty regarding the timing of collection prevented us from determining that collectibility of all amounts payable to us under the agreements was probable, resulting in a timing difference between recognition of cost and recognition of revenue.
Though we could not recognize the revenue until collectability was deemed probable, we expected to fully collect the amounts payable to us under our legally-enforceable agreements and, therefore, we recorded a receivable of $4.6 million in Prepaid expense and other current assets, and a liability of the same amount in Accrued expense and other current liabilities in December 2018. During the years ended December 31, 20202022 and 2019,2021, we recognizeddid not recognize revenue of approximately $0.5 million and $1.1 million, respectively, on the noted projects, resultingfrom performance obligations that were satisfied in the balances of Prepaid expense and other current assets and Accrued expense and other current liabilities each containing approximately $3.5 million related to such projects as of December 31, 2019, As of December 31, 2020, we could no longer ascertain the probability of collecting the remaining amounts receivable, and as a result, we offset the remaining asset balance of $3.1 million against the related liability.previous periods.
NOTE 5. FAIR VALUE MEASUREMENTSLIABILITIES RELATED TO WARRANTS TO PURCHASE COMMON STOCK
Liabilities Related to Warrants to Purchase Common Stock
At the end of each reporting period until expiry,through June 30, 2021, we usehad been using an option pricing model to estimate and report the fair value of liabilities related to certain outstanding warrants to purchase an aggregate of 575,000 shares of our common stock. Asstock, consisting of December 31, 2020,a warrant to purchase 4,000 of our outstanding liability-classified warrants include the warrantscommon stock that we issued orand warrants to purchase 571,000 shares of our common stock that we arewere obligated to issue as part of the consideration for our acquisition (the “CBG Acquisition”) of assets of China Branding Group Limited (“CBG”) in September 20162016.
On August 31, 2021 (the “CBG Settlement Effective Date”), we entered into a settlement agreement (the “CBG Settlement Agreement”) with CBG and its joint official liquidators to settle the parties’ claims against each other in the legal proceeding we filed arising from the CBG Acquisition Warrants”(the “CBG Litigation”). The warrants
Pursuant to the terms of the CBG Settlement Agreement, in consideration for a settlement of the parties’ claims and a mutual release, we issuedreleased to CBG the $375,000 held in escrow in connection with the financing we obtained forCBG Acquisition and issued to CBG, as of 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 $1.7 million as of December 31, 2020 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 warrants: | | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| CBG Financing Warrants | | | 85.00 | % |
| Expected volatility | | | 1.60 | % |
| Risk-free interest rate | | | 0.73 |
| Expected remaining term (years) | | | |
| | | |
| CBG Acquisition Warrants | | | |
| Expected volatility | 85.00 | % | | 75.00 | % |
| Risk-free interest rate | 0.18 | % | | 1.65 | % |
| Expected remaining term (years) | 2.73 | | 3.72 |
The following table presents the change in the liability balance associated with our liability-classifiedSettlement Effective Date, warrants (in thousands): | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Balance at beginning of period | $ | 115 | | | $ | 1,383 | |
| Expiration of warrants | (115) | | | 0 | |
| Increase (decrease) in fair value | 1,725 | | | (1,268) | |
| Balance at end of period | $ | 1,725 | | | $ | 115 | |
As of December 31, 2020 and 2019, warrants outstanding included CBG Acquisition Warrants which may be exercised to purchase 40,000as many as 571,000 shares of our common stock at a per-shareper share exercise price of $10.00 (we$60.00 (the “CBG Settlement Warrants”), which warrants are also committed to the future issuanceexercisable for a period of additional CBG Acquisition Warrants to purchase up to 5,710,000 of our common shares at the same per-share exercise price asfive years from the CBG Acquisition Warrant that has already been issued (see additional information in Note 16)) and, as of December 31, 2019,Settlement Effective Date. Additionally, if the CBG Financing Warrants, which could have been exercised to purchase 3,966,613 sharesclosing price of our common stock is $80.00 or greater for any five days (which may be non-consecutive) in any consecutive 30-day trading period, we have the right to cause the holder of the CBG Settlement Warrants to exercise, at anour election, all or any portion of the CBG Settlement Warrants on a cashless basis at a deemed exercise price of $3.70$80.00 per share.
Contingent Consideration Issued in Business Acquisition
We usedevaluated the discounted cash flow valuation technique to estimate the fair valueterms of the liability related to certain cash paymentsCBG Settlement Warrants and determined that we were obligated make related to our acquisition of Vegas.com, LLC (“Vegas.com”) in September 2015 that were contingent upon the performance of Vegas.com in the years ended December 31, 2016, 2017, and 2018 (the “Earnout Payments”). The significant unobservable inputs that we used, which we classify in Level 3 of the fair value hierarchy, were projected earnings before interest, taxes, depreciation and amortization (“EBITDA”), the probability of achieving certain amounts of EBITDA, and the rate used to discount the liability. On August 19, 2020, we paid all amounts that had remained outstanding related to the Earnout Payments and extinguished this liability.
The following table presents the change during the years ended December 31, 2020 and 2019 in the balance of thethey should now be classified as equity. As a result, there is no longer a liability associated with the Earnout Payments (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Balance at beginning of period | $ | 1,086 | | | $ | 990 | |
| Payments | (1,132) | | | (8) | |
| Change in fair value of contingent consideration | 0 | | | 10 | |
| Interest accrued on unpaid balance | 46 | | | 94 | |
| Balance at end of period | $ | 0 | | | $ | 1,086 | |
On the Consolidated Balance Sheets, we included the liability for contingent consideration as a componentany of Accrued expense and other liabilities.
our outstanding warrants.
When reclassifying the previously liability-classified warrants as equity on August 31, 2021, we used Level 3 inputs to our model consisting of an expected volatility of 85%, a risk-free interest rate of 0.77%, and an expected remaining term of five years.
The following table presents the change in the liability balance associated with our liability-classified warrants (in thousands) during the prior year ended December 31, 2021:
| | | | | |
| Balance at beginning of period | $ | 1,725 | |
| Expiration of warrants | — | |
| Increase (decrease) in fair value of liability | (123) | |
| Fair value of warrants reclassified to equity | (1,602) | |
| Balance at end of period | $ | — | |
NOTE 6. TRADE ACCOUNTS RECEIVABLE
The following table presents details regarding our net trade accounts receivable:
| | | | | | | | | | | | | | | December 31, |
| | | Year Ended December 31, | | | 2022 | | 2021 |
| | | 2020 | | 2019 | |
| Gross accounts receivable balance | Gross accounts receivable balance | | $ | 5,988 | | | $ | 4,171 | | Gross accounts receivable balance | | $ | 7,213 | | | $ | 11,551 | |
| Allowance for bad debt | Allowance for bad debt | | (961) | | | (2,207) | | Allowance for bad debt | | (4,122) | | | (1,284) | |
| Accounts receivable, net | Accounts receivable, net | | $ | 5,027 | | | $ | 1,964 | | Accounts receivable, net | | $ | 3,091 | | | $ | 10,267 | |
Generally, it is not unusual for Chinese entities to pay their vendors on longer timelines than the timelines typically observed in U.S. commerce. As of December 31, 2020 and 2019, the gross accounts receivable balances included $5.8 million and $4.1 million, respectively,Trade receivables related to our China-based business, whileChina AI projects in the allowanceyears ended December 31, 2022 and 2021; including $1.1 million and $2.7 million, respectively, of trade receivables from projects related to work with our China Business Partner (see Note 19 for more information regarding our China Business Partner and related accounting), respectively; represented essentially all our gross trade receivables in each such period. Despite the longer collection timelines normally observed with Chinese entities, we have noted that the COVID-19-related lockdowns that persisted in China for most of 2022 have caused further delay in our ability to collect all balances due from some of our customers in China. As a result of our inability to assure collection of all amounts due from such customers within a short period of time, we recorded a reserve for bad debt related to such balances on such dates were $0.9of approximately $2.8 million and $2.2 million, respectively.for all accounts receivable from China customers that are more than one year past due.
NOTE 7. INVESTMENTS IN UNCONSOLIDATED AFFILIATESINVESTMENT
In 2009, we co-founded a U.S.-based venture, Sharecare, Inc. (“Legacy Sharecare”), to build a web-based platform that simplifies the search for health and wellness information. The other co-founders of Legacy Sharecare were Dr. Mehmet Oz, HARPO Productions, Discovery Communications, Jeff Arnold and Sony Pictures Television. At December 31, 2021, we reported our $1.0 million investment in Legacy Sharecare as an investment in unconsolidated affiliate.
On July 1, 2021, 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. The cash received was recorded as a realized gain on the investment, and the investment is revalued at fair value at the end of each reporting period using the closing sales price of the shares on the principal securities exchange on which such shares are then traded.
As of December 31, 2020 and 2019, we owned approximately 4.4% of Sharecare’s issued capital stock and maintained representation on its Board of Directors. The2021, the value of our 9,431,920 shares of common stock of New Sharecare was $42.3 million based upon the investmentclosing stock price of New Sharecare, an input we classify in Level 1 of the fair value hierarchy. We sold 3,181,920 shares of New Sharecare in accordance with GAAP was approximately $1.0 million as ofduring the year ended December 31, 2020 and 2019.2022 for cash of $6.3 million.
On July 2, 2022, we received a Notice of Trigger Event and Mandatory Payment from our senior lenders, which required that we make a prepayment of our consolidated VIEs acquiredsenior secured loans (which are described in Note 14) by delivering to each lender shares of common stock of New Sharecare in the fair market amount applicable to each such lender to prepay our senior secured loans. On July 11, 2022, we delivered our remaining 6,250,000 shares of New Sharecare, which reduced the outstanding principal amount on our senior secured loans by approximately $9.7 million, and as a 20% interestresult, we no longer own any equity interests in AIO, a Chinese technology company which provides consulting and data services toNew Sharecare as of such date.
The total net loss on investment during the Chinese film industry, in exchange for $1.0 million, of which $500,000 was paid byyear ended December 31, 2020, and a license to use our proprietary KanKan data intelligence platform in China. Based on our evaluation of the facts and circumstances related to the transaction, we accounted for the investment resulting from such transaction using the equity method of accounting. From our acquisition of the investment in AIO through December 31, 2020, the amount of our equity in AIO’s net losses from the date we acquired our interest in AIO until December 31, 20202022 was approximately $0.1 million. Based on additional information we obtained during 2020, we determined that the COVID-19 outbreak in China had permanently ended AIO's ability to conduct its business and we wrote off our remaining investment of $0.9 million in that entity, which, when netted against the remaining $0.5 million we owed to AIO for the equity interest, resulted in a loss on impairment of $0.4$26.4 million.
NOTE 8. DEFERRED COST OF REVENUE
Deferred cost of revenue during years ended December 31, 2022 and 2021 of $7.5 million and $0.6 million, respectively, represents amounts we have paid in advance of the vendor providing services to us in relation to various projects in China. Specifically, the deferred cost of revenue balance during year ended December 31, 2022, a large percentage of which was related to project installations we expected would be provided to us through our China Business Partner (described in more detail in Note 19), was paid almost entirely to a single vendor which will be visiting numerous sites across various regions of China to install our software solutions and/or hardware for our customers and perform other services for us pursuant to customer requirements. Because most of the projects for which we have engaged the vendor require purchases of hardware, equipment and/or supplies in advance of site visits, we made the prepayments during 2022 in anticipation of what we expected would be several large batches of project installations so that we would be ready to meet customer expectations. The lengthy COVID-19-related lockdowns that occurred in various regions in China, however, prevented us and the vendor from being able to complete as many projects as originally expected and they caused customers to delay installations. Given that the delays were related to COVID-19-related lockdowns that had ended by December 31, 2022 and were not a result of the vendor’s inability to either perform the services or refund the amounts we advanced, we believe the balance at December 31, 2022 will be fully recovered.
NOTE 8.9. PREPAID EXPENSE AND OTHER CURRENT ASSETS
The following table presents the components of prepaid expense and other current assets (in thousands):
| | | December 31, | | December 31, |
| | 2020 | | 2019 | | 2022 | | 2021 |
| | Receivable from China Business Partner | | Receivable from China Business Partner | $ | — | | | $ | 3,980 | |
| Other receivables | Other receivables | $ | 8 | | | $ | 3,712 | | Other receivables | 23 | | | 9 | |
| Prepaid expense | Prepaid expense | 1,877 | | | 633 | | Prepaid expense | 1,144 | | | 1,558 | |
| Deposits | Deposits | 50 | | | 7 | | Deposits | 201 | | | 221 | |
| | Other current assets | Other current assets | 108 | | | 271 | | Other current assets | 6 | | | 6 | |
| Total | Total | $ | 2,043 | | | $ | 4,623 | | Total | $ | 1,374 | | | $ | 5,774 | |
|
Most of the Other receivables balance at December 31, 2019 represented amounts receivable under certain agreements related to AI-based product sales (see Note 4 for more information).
NOTE 9.10. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands, except estimated lives):
| | | December 31, | | December 31, |
| | Estimated Life
(Years) | | 2020 | | 2019 | | Estimated Life
(Years) | | 2022 | | 2021 |
| | Vehicles | | Vehicles | 3 | | 153 | | | — | |
| Computers and equipment | Computers and equipment | 3 | | 1,097 | | | 989 | | Computers and equipment | 3 | | 1,170 | | | 1,133 | |
| Furniture and fixtures | Furniture and fixtures | 3 | | 42 | | | 23 | | Furniture and fixtures | 3 | | 42 | | | 42 | |
| Software | Software | 3 | | 5,006 | | | 4,896 | | Software | 3 | | 5,160 | | | 5,055 | |
| | Leasehold improvements | Leasehold improvements | 3 | | 174 | | | 114 | | Leasehold improvements | 3 | | 204 | | | 196 | |
| Software development in progress | | Software development in progress | | 1,199 | | | 128 | |
| Total property, equipment and software | Total property, equipment and software | | $ | 6,319 | | | $ | 6,022 | | Total property, equipment and software | | $ | 7,928 | | | $ | 6,554 | |
| Less accumulated depreciation and amortization | | (5,998) | | | (5,681) | | |
| Less accumulated depreciation | | Less accumulated depreciation | | (6,229) | | | (6,197) | |
| Total property, equipment and software, net | Total property, equipment and software, net | | $ | 321 | | | $ | 341 | | Total property, equipment and software, net | | $ | 1,699 | | | $ | 357 | |
For the years ended December 31, 20202022 and 2019,2021, depreciation (and amortization of software) expense was $0.2 million and $0.7$0.2 million, respectively.
NOTE 10.11. LEASES
We lease office space and a vehicle under contracts we classify as operating leases. None of our leases are financing leases.
The following table presents the detail of our lease expense, (we did not receive sublease income during the year ended December 31, 2020) which is reported in General and administrative expense (in thousands):
| | | | | | | |
| | | |
| | | |
Operating lease expense | $ | 640 | | | |
Short-term lease expense | 291 | | | |
| | | |
Lease expense | $ | 931 | | | |
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 |
| Operating lease expense | | | | | $ | 287 | | | $ | 304 | |
| Short-term lease expense | | | | | 1,343 | | | 982 | |
| | | | | | | |
| Lease expense | | | | | $ | 1,630 | | | $ | 1,286 | |
We reported within continuing operating cash flows for the yearyears ended December 31, 2020, $0.62022 and 2021, $0.2 million and $0.2 million, respectively, of cash paid for amounts included in the measurement of operating lease liabilities.
As of December 31, 2020,2022, our operating leases had a weighted-average remaining lease term of approximately twenty12 months, and we used a weighted-average discount rate of approximately 13%, which approximates our incremental borrowing rate, 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 December 31, 2020 Consolidated Balance Sheet (in thousands).
| | | | | |
Operating lease liabilities maturing during the next: | |
One year | $ | 412 | |
Two years | 210 | |
Three years | 25 | |
Total undiscounted cash flows | $ | 647 | |
Present value of cash flows | $ | 576 | |
| |
Lease liabilities on balance sheet: | |
Short-term | $ | 382 | |
Long-term | 194 | |
Total lease liabilities | $ | 576 | |
| |
Termination of Lease and Related Landlord Actions
Beginning approximately July 2019, we were not able to pay our obligations under the office lease for our former office located at 3960 Howard Hughes Parkway in Las Vegas, Nevada. On March 5, 2020, our former landlord, BRE/HC Las Vegas Property Holdings, L.L.C (the “Hughes Center Landlord”), exercised its right to terminate the lease as of such date as a result of the ongoing payment default. When we derecognized the right-of-use asset and the portion of the operating lease liability related to the original schedule of future amounts due to the Hughes Center Landlord in March 2020, we recognized a gain on lease termination of slightly more than $1.5 million.
On April 9, 2020, the Hughes Center Landlord filed suit against us in Nevada to recover the approximately $1.1 million of rent owed through March 5, 2020, plus damages resulting from the early termination of the lease.
As of December 31, 2019, we had accrued approximately $2.3 million for settlement of the legal action filed by the Hughes Center Landlord. During the first quarter of 2020, prior to the Hughes Center Landlord’s termination of the lease agreement, we accrued an additional $0.3 million, resulting in total liabilities related to this matter of $2.6 million.
On August 3, 2020, we entered into a settlement agreement with the Hughes Center Landlord (the “Hughes Center Lease Settlement”), pursuant to which we paid only $0.6 million to the Hughes Center Landlord in full settlement of our obligations with respect to such office lease. On November 5, 2020, the Hughes Center Landlord filed a Notice of Voluntary Dismissal with Prejudice with the District Court of Clark County, Nevada dismissing their legal action against us. The slightly more than $2.0 million gain related to the Hughes Center Lease Settlement, in addition to the slightly more than $1.5 million gain on lease termination we recorded in March 2020, resulted in a total gain on lease termination of approximately $3.6 million.
Other
As of December 31, 2020, approximately $0.1 million remained in the balance of Prepaid expense and other current assets related to a short-term lease on a property we rented in the Los Angeles, California area.
Maturity of Lease Liabilities
The following table presents information regarding the maturities of undiscounted remaining operating lease payments, with a reconciliation to the amount of the liabilities representing such payments as presented in our December 31, 2022 Consolidated Balance Sheet (in thousands):
| | | | | |
| Operating lease liabilities maturing during the next: | |
| One year | $ | 155 | |
| Two years | 60 | |
| |
| |
| |
| |
| Total undiscounted cash flows | $ | 215 | |
| Present value of cash flows | $ | 194 | |
| |
| Lease liabilities on balance sheet: | |
Short-term (included in accrued expenses) | $ | 138 | |
| Long-term | 56 | |
| Total lease liabilities | $ | 194 | |
| |
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.
NOTE 11. INTANGIBLE ASSETS
Intangible Assets
The following table summarizes intangible assets by category (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Gross Amount | | Accumulated
Amortization | | Net Amount | | Gross Amount | | Accumulated
Amortization | | Net Amount |
| Finite-lived intangible assets | | | | | | | | | | | |
| Domain names | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,256 | | | $ | (874) | | | $ | 382 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other intangible assets | 0 | | | 0 | | | 0 | | | 68 | | | (68) | | | 0 | |
| $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,324 | | | $ | (942) | | | $ | 382 | |
| Indefinite-lived intangible assets | | | | | | | | | | | |
| | | | | | | | | | | |
| License to operate in China | 0 | | | | | 0 | | | 127 | | | | | 127 | |
| Total intangible assets | $ | 0 | | | | | $ | 0 | | | $ | 1,451 | | | | | $ | 509 | |
For the years ended December 31, 2022 and 2021, we did not have a material tax provision or a tax benefit to report, as we only had a de minimis foreign income tax expense for the year ended December 31, 2020 and 2019, total amortization expense2021, which amount was $0.2 million and $0.3 million, respectively.
Duringrefunded to us during the fourth quarter of 2020, we determined that the remaining portion of the intangible asset representing the bikini.com domain name was impaired based on revised cash flow estimates, so we recorded an impairment loss of approximately $0.3 million. Additionally, we determined that a legacy business license in China was no longer necessary to our continuing operations and we, therefore, recorded a loss on impairment of approximately $0.1 million.
During the fourth quarter of 2019, we decided that we would no longer create content that could make use of the intangible asset related to media content and broadcast rights. As a result, we determined that the remaining portion of such intangible asset was impaired based on revised cash flow estimates, so we recognized an impairment loss of approximately $0.2 million.
NOTE 12. STOCKHOLDERS' EQUITY, SHARE-BASED COMPENSATION AND NET LOSS PER SHARE0
Common Shares Authorized
Our Amended and Restated Certificate of Incorporation authorizes us to issue up to 100,000,000 shares of our common stock, of which 99,916,941 shares were outstanding as of March 29, 2021. In addition, as of March 29, 2021, we had outstanding stock options allowing for the purchase of as many as approximately 15.3 million shares of common stock and we had outstanding warrants to purchase 40,000 shares of common stock. If all of our outstanding stock options and warrants were exercised, the total number of shares of our common stock that we would be required to issue would greatly exceed the number of our remaining authorized but unissued shares of common stock.
As a result of such potential shortfall in the number of our authorized shares of common stock, we will have insufficient shares of common stock available to issue in connection with the exercise of our outstanding stock options and warrants or any future equity financing transaction we may seek to undertake. Accordingly, we intend to seek approval of an increase in the number of our authorized shares of common stock at a 2021 special meeting of stockholders.
Equity Issuances
On March 29, 2019, we entered into the 2019 Aspire Purchase Agreement with Aspire Capital. In consideration for entering into the 2019 Aspire Purchase Agreement, we issued 629,370 shares of our common stock to Aspire Capital.
As of December 31, 2019, we had issued to Aspire Capital a total of 4,129,370 shares of our common stock under the 2019 Aspire Purchase Agreement. During the year ended December 31, 2019, we issued a total of 11,999,597 shares of our common stock to private investors and to Aspire Capital in exchange for $10.8 million plus Aspire Capital’s commitment to participate in the 2019 Aspire Purchase Agreement.
On March 3, 2020, we entered into the 2020 Aspire Purchase Agreement with Aspire Capital which provided that, upon the terms and subject to the conditions and limitations set forth therein, we had the right to direct Aspire Capital to purchase up to an aggregate of $30.0 million of shares of our common stock over the 30-month term of the 2020 Aspire Purchase Agreement. The 2020 Aspire Purchase Agreement replaced the 2019 Aspire Purchase Agreement, which terminated under the terms of the 2020 Aspire Purchase Agreement. In consideration for entering into the 2020 Aspire Purchase Agreement, we issued to Aspire Capital 2,374,545 shares of our common stock.
As of December 31, 2020, we had issued to Aspire Capital a total of 44,227,890 shares of our common stock under the 2020 Aspire Purchase Agreement. During the year ended December 31, 2020, we issued a total of 48,238,893 shares of our common stock to Aspire Capital under the 2019 Aspire Purchase Agreement and the 2020 Aspire Purchase Agreement in exchange for $32.0 million plus Aspire Capital’s commitment to participate in the 2020 Aspire Purchase Agreement.
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.
We estimate the fair value of stock option awards using the BSM Model. During the year ended December 31, 2019 (we did not grant any stock options during the year ended December 31, 2020), we applied the following weighted-average assumptions: | | | | | | | |
| | | |
| | | |
Expected term in years | | | 6.0 |
Expected volatility | | | 70 | % |
Expected dividends | | | 0 | % |
Risk-free interest rate | | | 1.86 | % |
We estimated the expected term based upon historical data. The risk-free interest rate is based on the U.S. Treasury yield curve appropriate for the expected term on the date of grant, and we estimate the expected volatility primarily using the historical volatility of our common stock. Actual compensation, if any, ultimately realized may differ significantly from the amount estimated using an option-pricing model.
The following table summarizes activity under our equity incentive plans related to equity-classified stock option grants as of December 31, 2020, and changes during the twelve months ended: | | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term
(in years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at January 1, 2020 | 10,359,079 | | | $ | 4.20 | | | | | |
| Granted | 0 | | | 0 | | | | | |
| Exercised | (150,989) | | | 0.87 | | | | | |
| Forfeited, cancelled or expired | (265,749) | | | 2.77 | | | | | |
| Outstanding at December 31, 2020 | 9,942,341 | | | $ | 4.29 | | | 5.7 | | $ | 709 | |
| Options exercisable at December 31, 2020 | 9,781,466 | | | $ | 4.35 | | | 5.7 | | $ | 509 | |
The following table summarizes the status of non-vested stock options as of December 31, 2020, and changes during the year then ended: | | | | | | | | | | | |
| Shares | | Weighted-Average
Grant-Date Fair Value |
| Non-vested at January 1, 2020 | 610,187 | | | $ | 241 | |
| Granted | 0 | | | 0 | |
| Vested | (399,188) | | | 168 | |
| Forfeited | (50,124) | | | 53 | |
| Non-vested at December 31, 2020 | 160,875 | | | $ | 68 | |
For the year ended December 31, 2019, the weighted-average grant-date fair value of options granted was $0.3 million. We received proceeds from stock option exercises during the year ended December 31, 2020 totaling approximately $0.1 million, while the total intrinsic value on such stock option exercises was $0.1 million. We did not experience material stock option exercises during the year ended December 31, 2019.
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.
The following table summarizes activity under our equity incentive plans related to the China Cash Bonuses as of December 31, 2020, and changes during the twelve months then ended: | | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term
(in years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at January 1, 2020 | 1,098,750 | | | $ | 5.20 | | | | | |
| Granted | 300,000 | | | 1.37 | | | | | |
| | | | | | | |
| Forfeited, cancelled or expired | (343,750) | | | 5.52 | | | | | |
| Outstanding at December 31, 2020 | 1,055,000 | | | $ | 4.01 | | | 6.4 | | $ | 200 | |
| Cash awards exercisable at December 31, 2020 | 775,000 | | | $ | 4.97 | | | 5.3 | | $ | 51 | |
We account for the China Cash Bonuses as liabilities because they are settled in cash upon exercise. The following table presents the change in the liability balance associated with the China Cash Bonuses (in thousands): | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Balance at beginning of period | $ | 43 | | | $ | 149 | |
| Increase (decrease) in share-based compensation cost | 637 | | | (106) | |
| Balance at end of period | $ | 680 | | | $ | 43 | |
The following table presents a breakdown of share-based compensation cost included in operating expense (in thousands): | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | |
| Stock options | $ | 160 | | | $ | 425 | | | |
| China Cash Bonuses | 637 | | | (106) | | | |
| Total | $ | 797 | | | $ | 319 | | | |
We record share-based compensation expense in the books of the subsidiary that incurs the expense, while for equity-classified stock options we record the change in additional paid-in capital on the corporate entity because the corporate entity’s equity underlies such stock options.
The following table presents information regarding unrecognized share-based compensation cost associated with stock options and China Cash Bonuses: | | | | | |
| December 31, 2020 |
Unrecognized share-based compensation cost for non-vested awards (in thousands): | |
Stock options | 28 | |
China Cash Bonuses | 374 | |
Weighted-average years over which unrecognized share-based compensation expense will be recognized: | |
Stock options | 0.3 |
China Cash Bonuses | 5.0 |
NOTE 13. INCOME TAX
For the year ended December 31, 2020, and 2019, we did not have a tax provision or a tax benefit to report.
The following table presents a reconciliation between the income tax benefit computed by applying the federal statutory rate and our actual income tax expense:
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2020 | | 2019 | | | 2022 | | 2021 | |
| Income tax benefit at federal statutory rate | $ | (2,874) | | | $ | (4,831) | | | |
| Income tax benefit (provision) at federal statutory rate | | Income tax benefit (provision) at federal statutory rate | $ | (11,653) | | | $ | 5,771 | | |
| Change in deferred tax asset valuation allowance | Change in deferred tax asset valuation allowance | 1,670 | | | 2,561 | | | Change in deferred tax asset valuation allowance | 10,611 | | | (5,241) | | |
| Tax impact of warrants | Tax impact of warrants | 338 | | | (266) | | | Tax impact of warrants | — | | | (26) | | |
| Tax effects of: | Tax effects of: | | | Tax effects of: | | |
| Statutory differences | Statutory differences | 1,014 | | | 942 | | | Statutory differences | 883 | | | 327 | | |
| R&D expense | R&D expense | (202) | | | (236) | | | R&D expense | (280) | | | (210) | | |
| Foreign tax rates different than U.S. federal statutory rate | Foreign tax rates different than U.S. federal statutory rate | (96) | | | (350) | | | Foreign tax rates different than U.S. federal statutory rate | (123) | | | 68 | | |
| Other permanent items | Other permanent items | 155 | | | 6 | | | Other permanent items | (42) | | | (331) | | |
| Deferred adjustments | Deferred adjustments | 86 | | | 1,716 | | | Deferred adjustments | 404 | | | 99 | | |
| Other | Other | (91) | | | 458 | | | Other | 209 | | | (466) | | |
| Income tax provision (benefit) as reported | $ | 0 | | | $ | 0 | | | |
| Income tax benefit (provision) as reported | | Income tax benefit (provision) as reported | $ | 9 | | | $ | (9) | | |
Our 20202022 and 20192021 effective tax rates were significantly impacted by maintaining a valuation allowance against net deferred tax assetassets in all jurisdictions, both domestic and foreign, as well as permanent book-tax adjustments in foreign jurisdictions and the fact that our earnings are generated in jurisdictions with rates that differ from the US federal statutory rate.
The following table presents loss before income tax attributable to domestic and to foreign operations (in thousands):
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2020 | | 2019 | | | 2022 | | 2021 | |
| Domestic | Domestic | $ | (11,289) | | | $ | (14,266) | | | Domestic | $ | (49,297) | | | $ | 28,036 | | |
| Foreign | Foreign | (2,396) | | | (8,738) | | | Foreign | (6,195) | | | (555) | | |
| Loss before income taxes | Loss before income taxes | $ | (13,685) | | | $ | (23,004) | | | Loss before income taxes | $ | (55,492) | | | $ | 27,481 | | |
|
Deferred Tax Assets and Liabilities
We assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of existing DTAs in each jurisdiction. A significant pieceThe realization of objective negative evidence, in each jurisdiction, that we evaluated wasDTAs is dependent upon the cumulative loss incurred over the three-year period ended December 31, 2020. Such objective evidence limits our ability to consider other subjective evidence. On the basis of our evaluation, as of December 31, 2020, we continued to maintain the valuation allowance noted in the table below. The amount of the DTAs that we do not consider realizable, however, could be adjusted if estimatesgeneration of future taxable income during the carryforward period are reduced or increased or if objectiveperiods in which those temporary differences become deductible. The Company considered the scheduled reversal of existing deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company evaluated both positive and negative evidence in determining the formneed for a valuation allowance. The Company continues to assess the realizability of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for future growth.
The following table presents the components of our DTAs and DTLs (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Deferred Tax Assets | | | |
| Net operating loss carryforwards | $ | 41,061 | | | $ | 38,008 | |
| Deferred income and reserves | 0 | | | 0 | |
| | | |
| Amortization of intangibles | 2,167 | | | 2,535 | |
| Share-based compensation expense | 6,876 | | | 6,929 | |
| Other | 3,000 | | | 4,000 | |
| Gross deferred tax assets | $ | 53,104 | | | $ | 51,472 | |
| Valuation allowance | (53,117) | | | (51,455) | |
| Deferred tax assets, net of valuation allowance | $ | (13) | | | $ | 17 | |
| Deferred Tax Liabilities | | | |
| Depreciation of fixed assets | 13 | | | (17) | |
| | | |
| | | |
| Gross deferred tax liabilities | 13 | | | (17) | |
| Net deferred tax liability | $ | 0 | | | $ | 0 | |
Net operating losses available atconcluded that in each jurisdiction, it has not met the “more likely than not” threshold. As of December 31, 20202022, the Company continues to provide a valuation allowance against its DTAs that cannot be offset future taxable incomeby existing deferred tax liabilities. In accordance with ASC Topic 740, this assessment has taken into consideration the jurisdictions in the U.S. federal, U.S. state, Hong Kong and China jurisdictions are $172.8 million, $31.9 million, $1.7 million and $11.4 million, respectively. The statutory income tax rates in Hong Kong and China are 16.5% and 25%, respectively.
The U.S. net operating losses generated prior to 2018 expire between 2020 and 2038. The US net operating losses generated in 2018 to 2020 have no expiration date and carry forward indefinitely. The net operating losses generated in Hong Kong have no expiration date and carry forward indefinitely, while the net operating losses generated in China have a five-year carryforward period.
The following table presents the components of our DTAs and DTLs (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Deferred Tax Assets | | | |
| Net operating loss carryforwards | $ | 42,744 | | | $ | 43,375 | |
| Amortization of intangibles | 2,371 | | | 1,979 | |
| Share-based compensation expense | 7,865 | | | 7,423 | |
| Depreciation of fixed assets | 33 | | | — | |
| Other | 5,427 | | | 3,503 | |
| Gross deferred tax assets | $ | 58,440 | | | $ | 56,280 | |
| Valuation allowance | (58,440) | | | (47,857) | |
| Deferred tax assets, net of valuation allowance | $ | — | | | $ | 8,423 | |
| Deferred Tax Liabilities | | | |
| Deferred gain | — | | | (8,444) | |
| Depreciation of fixed assets | — | | | 21 | |
| Gross deferred tax liabilities | — | | | (8,423) | |
| Net deferred tax liability | $ | — | | | $ | — | |
Net operating losses available at December 31, 2022 to offset future taxable income in the U.S. federal, U.S. state, Hong Kong and China jurisdictions are $177.8 million, $33.1 million, $1.7 million and $11.7 million, respectively. The statutory income tax rates in Hong Kong, China and the United Kingdom are 16.5%, 25% and 19%, respectively.
The U.S. net operating losses generated prior to 2018 expire between 2027 and 2037. The US net operating losses generated in 2018 to 2022 have no expiration date and carry forward indefinitely. The net operating losses generated in Hong Kong and United Kingdom have no expiration date and carry forward indefinitely, while the net operating losses generated in China have a five-year carryforward period.
We file income tax returns in various domestic and foreign tax jurisdictions with varying statutes of limitation. We are generally not subject to examinations in the U.S. for periods prior to 2017.2019. However, as we utilize our net operating losses prior periods can be subject to examination. In significant foreign jurisdictions, we are generally not subject to examination for periods prior to 2017.2019.
Under the Internal Revenue Code of 1986, as amended (the “Code”), if an ownership change (as defined for income tax purposes) occurs, §382 of the Code imposes an annual limitation on the amount of a corporation’s taxable income that can be offset by net operating loss carryforwards. During our 2014 tax year, we analyzed recent acquisitions and ownership changes and determined that certain of such transactions qualified as an ownership change under §382. As a result, we will likely not be able to use a portion of our net operating loss carryforwards.
For the years ended December 31, 20202022 and 2019,2021, we have 0no unrecognized tax benefits, and we have not taken any tax positions which we expect might significantly change unrecognized tax benefits during the 12 months following December 31, 2020. We comply with tax legislation and rules that apply in jurisdictions in which we operate around the globe, to the best of our ability. In China, we incur certain business expenses subject to jurisdictionally-specific requirements. While we have adhered to such rules, circumstances exist outside of our control that create uncertainty relative to our ability to sustain certain deductions. We believe, at more likely than not level, we will sustain such deductions; however, taxing authorities in China may take an alternative position.2022.
The 2017 Tax Cuts and Jobs Act requires taxpayers to capitalize research and experimental (“R&E”) expenditures effective for taxable years beginning after December 31, 2021. Any R&E expenditures attributable to U.S.-based research must be amortized over a period of 5 years and R&E expenditures attributable to research conducted outside of the U.S. must be amortized over a period of 15 years.
In responseAugust 2022, two pieces of U.S. tax legislation that have significant tax-related provisions were signed into law: (1) the Creating Helpful Incentives to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. The Coronavirus Aid, Relief, and Economic SecurityProduce Semiconductors Act of 2022 (the “CARES“CHIPS Act”), which was enactedcreates a new advanced manufacturing investment credit under new Internal Revenue Code Section 48D, and (2) the Inflation Reduction Act of 2022 (the “IRA”), which has a number of tax-related provisions, including: (a) a 15 percent book minimum tax on March 27, 2020“adjusted financial statement income of applicable corporations,” (b) a plethora of clean energy tax incentives in the U.S., includes measures to assist companies, including temporary changes toform of tax credits, and (c) a one percent excise tax on certain corporate stock buybacks. We will monitor additional guidance and impact that the CHIPS Act, the IRA and other potential legislation may have on its income and non-income-based tax laws. Wetaxes. For the period ended December 31, 2022, we do not believe anythe provisions thereinfrom these legislative updates will have a material impact on our income taxes.
NOTE 13. ACCRUED EXPENSE AND OTHER CURRENT LIABILITIES
The following table presents the components of Accrued expense and other current liabilities (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| | | |
| Accrued compensation and benefit-related expense | $ | 1,448 | | | $ | 821 | |
| Accrued interest | 769 | | | 385 | |
| Other accrued expense | 2,393 | | | 1,673 | |
| Other payables | 2,234 | | | 2,324 | |
| Operating lease liability - current | 138 | | | 187 | |
| China Cash Bonuses | 32 | | | 439 | |
| Other current liabilities | 208 | | | 134 | |
| Total | $ | 7,222 | | | $ | 5,963 | |
| | | |
NOTE 14. DEBT
The following table presents our notes payable (in thousands) as of:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Principal balance of Original Mudrick Loans | $ | 14,418 | | | $ | 30,000 | |
| Other notes payable | 189 | | | — | |
| Unamortized discount and debt issuance cost | — | | | (2,189) | |
| Notes payable, net of unamortized discount and debt issuance cost | $ | 14,607 | | | $ | 27,811 | |
| | | |
On December 3, 2021, we entered into senior secured loan agreements (the “Original Mudrick Loan Agreements”) with certain of our subsidiaries as guarantors (the “Guarantors”) and certain institutional lenders affiliated with Mudrick Capital Management, LP (collectively, “Mudrick”), pursuant to which Mudrick extended credit to us consisting of term loans in the aggregate principal amount of $30.0 million (the “Original Mudrick Loans”). The Original Mudrick Loans bore interest at 16.5% per annum until the original maturity date of July 31, 2022 and, following an amendment we entered into with Mudrick in August 2022, bore interest at 18.5% per annum. The amendment also extended the maturity date of the Original Mudrick Loans from July 31, 2022 to October 31, 2022. However, we did not make the required repayment of the Original Mudrick Loans by October 31, 2022, which constituted an event of default under the Original Mudrick Loans and triggered an increase in the interest rate under the Original Mudrick Loans to 20.5%.
To secure the payment and performance of the obligations under the Original Mudrick Loan Agreements, we, together with the Guarantors, have granted to TMI Trust Company, as the collateral agent for the benefit of Mudrick, a first priority lien on, and security interest in, all assets of Remark and the Guarantors, subject to certain customary exceptions.
In connection with our entry into the Original Mudrick Loan Agreements, we paid to Mudrick an upfront fee equal to 5.0% of the amount of the Original Mudrick Loans, which amount was netted against the drawdown of the Original Mudrick Loans. We recorded the upfront fee as a debt discount of $1.5 million, and recorded debt issuance cost totaling $1.1 million. We amortized the discount on the Original Mudrick Loans and the debt issuance cost over the life of the Original Mudrick Loans and, during the year ended December 31, 2022, we amortized $2.2 million of such discount and debt issuance cost. In consideration for the amendment we entered into with Mudrick in August 2022, we paid Mudrick an amendment and extension payment in the amount of 2.0% of the then unpaid principal balance of the Original Mudrick Loans, or approximately $0.3 million, by adding such amount to the principal balance of the Original Mudrick Loans.
See Note 20 for more information regarding further developments involving the Original Mudrick Loans.
During the year ended December 31, 2022, we repaid $6.2 million of principal and, as described in more detail in Note 7, we delivered all remaining shares of New Sharecare to Mudrick on July 11, 2022, in partial settlement of the Original Mudrick Loans, resulting in a reduction of approximately $9.7 million of principal.
Other Notes Payable
The Other notes payable in the table above represent individually immaterial notes payable issued for the purchase of operating assets. Such notes payable bear interest at a weighted-average interest rate of approximately 6.2% and have a weighted-average remaining term of approximately 5.1 years.
Effective August 5, 2021 (the “Conversion Date”), pursuant to an amendment on such date to a promissory note with a private lender that we originally executed on December 30, 2020 (the “Private Lender Loan”), the outstanding $1.0 million principal amount of the Private Lender Loan plus all accrued but unpaid interest of approximately $0.1 million 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 with a fair value of $1.1 million and the recording of less than $0.1 million of additional interest expense.
NOTE 15. TRANSACTIONS WITH IONIC
Liability Related to Convertible Debenture
On October 6, 2022, we entered into a debenture purchase agreement (the “2022 Debenture Purchase Agreement”) with Ionic Ventures, LLC (“Ionic”), pursuant to which we issued a convertible subordinated debenture in the original principal amount of $2.8 million (the “2022 Debenture”) to Ionic for a purchase price of $2.5 million. The 2022 Debenture automatically converted into shares of our common stock (the “Settlement Shares”) on November 17, 2022 upon the effectiveness of a registration statement we filed pursuant to a registration rights agreement we executed with Ionic. As of December 31, 2022, because the measurement period for determining the final conversion price pursuant to the 2022 Debenture Purchase Agreement was still ongoing, the number of Settlement Shares was estimated by dividing the outstanding balance under the 2022 Debenture (including accrued and unpaid interest) by a conversion price that was 80% of the average of the 10 lowest volume-weighted average prices (“VWAPs”) during the period from November 18, 2022 through December 31, 2022. The VWAPs used to estimate the number of Settlement Shares for purposes of estimating the fair value of the liability related to the convertible debenture are classified as Level 3 inputs.
Using the guidance in ASC Topic 480, Distinguishing Liabilities from Equity, we evaluated the convertible debenture and determined that it represented an obligation that must or may be settled with a variable number of shares, the monetary value of which was based solely or predominantly on a fixed monetary amount known at inception. We, therefore, recorded a liability for the 2022 Debenture on October 6, 2022, by estimating the number of Settlement Shares and multiplying by the market price of the stock on such date, resulting in an initial liability of approximately $3.6 million. We recorded the $1.1 million excess of the initial liability amount over the purchase price as finance cost. The liability is being remeasured at each balance sheet date with the change in the liability also being reflected as finance cost. During the fourth quarter of 2022, we issued 898,854 Settlement Shares, with the $2.0 million fair value of such issued Settlement Shares reducing the liability. At December 31, 2022, we estimated that another 1,720,349 Settlement Shares would need to be issued, representing a liability of approximately $1.9 million. During the fourth quarter of 2022, we also recorded $0.3 million of finance cost related to changes in the fair value of the liability during the period.
Equity Line of Credit
Also, on October 6, 2022, we entered into a purchase agreement (the “ELOC Purchase Agreement”) with Ionic, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Ionic to purchase up to an aggregate of $50.0 million of shares of our common stock over the 36-month term of the ELOC Purchase Agreement. Under the ELOC Purchase Agreement, after the satisfaction of certain commencement conditions, including, without limitation, the effectiveness of the Resale Registration Statement and that the 2022 Debenture shall have been fully converted into shares of common stock or shall otherwise have been fully redeemed and settled in all respects in accordance with the terms of the 2022 Debenture, we have the right to present Ionic with a purchase notice (each, a “Purchase Notice”) directing Ionic to purchase any amount up to $3.0 million of our common stock per trading day, at a per share price equal to 90% (or 80% if our common stock is not then trading on Nasdaq) of the average of the five lowest VWAPs over a specified measurement period. With each purchase under the ELOC Purchase Agreement, we are required to deliver to Ionic an additional number of shares equal to 2.5% of the number of shares of common stock deliverable upon such purchase. The number of shares that we can issue to Ionic from time to time under the ELOC Purchase Agreement shall be subject to the condition that we will not sell shares to Ionic to the extent that Ionic, together with its affiliates, would beneficially own more than 4.99% of the outstanding shares of our common stock immediately after giving effect to such sale (the “Beneficial Ownership Limitation”).
In addition, Ionic will not be required to buy any shares of our common stock pursuant to a Purchase Notice on any trading day on which the closing trade price of our common stock is below $0.25. We will control the timing and amount of sales of our common stock to Ionic. Ionic has no right to require any sales by us, and is obligated to make purchases from us as directed solely by us in accordance with the ELOC Purchase Agreement. The ELOC Purchase Agreement provides that we will not be required or permitted to issue, and Ionic will not be required to purchase, any shares under the ELOC Purchase Agreement if such issuance would violate Nasdaq rules, and we may, in our sole discretion, determine whether to obtain stockholder approval to issue shares in excess of 19.99% of our outstanding shares of common stock if such issuance would require stockholder approval under Nasdaq rules. Ionic has agreed that neither it nor any of its agents, representatives and affiliates will engage in any direct or indirect short-selling or hedging our common stock during any time prior to the termination of the ELOC Purchase Agreement.
The ELOC Purchase Agreement may be terminated by us at any time after commencement, at our discretion; provided, however, that if we sold less than $25.0 million to Ionic (other than as a result of our inability to sell shares to Ionic as a result of the Beneficial Ownership Limitation, our failure to have sufficient shares authorized or our failure to obtain stockholder approval to issue more than 19.99% of our outstanding shares), we will pay to Ionic a termination fee of $0.5 million, which is payable, at our option, in cash or in shares of common stock at a price equal to the closing price on the day immediately preceding the date of receipt of the termination notice. Further, the ELOC Purchase Agreement will automatically terminate on the date that we sell, and Ionic purchases, the full $50.0 million amount under the agreement or, if the full amount has not been purchased, on the expiration of the 36-month term of the ELOC Purchase Agreement. (See Note 20 for additional detail regarding certain amendments to the ELOC Purchase Agreement.)
On November 7, 2022, we entered into an amendment to the 2022 Debenture Purchase Agreement with Ionic, pursuant to which we and Ionic agreed to amend and restate the 2022 Debenture to provide that (i) in no event will the conversion price under the 2022 Debenture be below a floor price of $0.10 (such price, as may be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction, the “Floor Price”), and (ii) in the event the actual conversion price is less than the Floor Price, (A) Ionic will be entitled to that number of settlement conversion shares issuable with an assumed conversion price equal to the Floor Price, and (B) we will be required to make a cash payment to Ionic on or prior to the maturity date of an amount that is calculated by subtracting the number of shares of common stock issuable at an assumed conversion price equal to the Floor Price from the number of shares of common stock issuable at the actual conversion price, multiplied by a price equal to the average of the ten lowest VWAPs during the specified measurement period.
NOTE 14. ACCRUED EXPENSE16. COMMITMENTS AND OTHER CURRENT LIABILITIESCONTINGENCIES
The following table presentsAt December 31, 2022, we had no material commitments outside the componentsnormal course of Accrued expense and other current liabilities (in thousands): | | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| | | |
| Accrued compensation and benefit-related expense | $ | 1,151 | | | $ | 1,168 | |
| Accrued interest | 485 | | | 302 | |
| Other accrued expense | 721 | | | 1,171 | |
| Other payables | 3,048 | | | 3,656 | |
| Operating lease liability - current | 382 | | | 2,877 | |
| Other current liabilities | 873 | | | 5,152 | |
| Total | $ | 6,660 | | | $ | 14,326 | |
| | | |
Contingencies
As of December 31, 2022, 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.
Registration Rights Agreement
On September 27, 2021, we entered into a securities purchase agreement (the “Armistice Purchase Agreement”) with Armistice Capital Master Fund Ltd. (“Armistice Capital”) pursuant to which we issued shares of our common stock together with warrants to purchase our common stock, subject to certain customary anti-dilution adjustments (the “Armistice Warrants”).
In connection with our entry into the Armistice Purchase Agreement, we also entered into a registration rights agreement with Armistice Capital, pursuant to which we were obligated to file one or more registration statements, as necessary, to register under the Securities Act of 1933, as amended, the resale of the shares we issued to Armistice Capital and the shares underlying the Armistice Warrants (collectively, the “Armistice Registrable Securities”) and to obtain effectiveness of such registration statement no later than 90 days following September 27, 2021. The
balance in Other current liabilities inagreement provided that if we failed to satisfy our obligation to timely obtain effectiveness, we would incur a $0.1 million monthly penalty (up to a maximum of $1.0 million) until we achieved effectiveness. The registration statement to register the resale of the Armistice Registrable Securities was declared effective on October 31, 2022. As of December 31, 2021, we had accrued $0.6 million as an initial estimate of the penalty liability. During the year ended December 31,
2019 primarily represented potential revenue related2022, we accrued an additional $0.4 million to
projectsaccrue for the maximum penalty, of which we
describepaid $0.2 million of this amount, resulting in
Note 4 under the subheader Certain Agreements Related to AI-Based Product Sales.an unpaid amount of $0.8 million that is included in other accrued expense at December 31, 2022.
NOTE 15. DEBT17. STOCKHOLDERS' EQUITY, SHARE-BASED COMPENSATION AND NET LOSS PER SHARE
Short-Term DebtEquity Issuances
On April 12, 2017,September 29, 2021, we issued and sold to Armistice Capital 423,729 shares of our common stock at a short-term note payable inpurchase price of $11.80 per share together with the principal amountArmistice Warrants to purchase as many as 423,729 shares of $3.0our common stock at an exercise price of $13.50 per share, subject to certain customary anti-dilution adjustments, pursuant to the terms of the Armistice Purchase Agreement. We received net proceeds of $4.6 million from such sale. Concurrently with the entry into the Purchase Agreement, we also entered into a financial advisor agreement (the “Financial Advisor Agreement”) with A.G.P./Alliance Global Partners (“A.G.P.”), pursuant to which we agreed to pay A.G.P. 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 thousandapproximately $0.4 million and to reimburse A.G.P. for certain legal and escrow expenses. In addition, pursuant to the terms of the Financial Advisor Agreement, on September 29, 2021, we issued to A.G.P. and its designees warrants (the “Financial Advisor Warrants” and together with the Armistice Warrants, the “Private Placement Warrants”) to purchase as many as an aggregate of 12,712 shares of our common stock at an exercise price of $13.50 per share, subject to certain customary anti-dilution adjustments. Based on the maturity dateterms of June 30, 2017. The note is accruing interest at $500 per day on the unpaid principal untilPrivate Placement Warrants, we repay the note in full. As of December 31, 2020, the note was past due and we owed $1.5 million in principal and $0.4 million in accrued interest onrecorded such note, after making principal payments totaling $1.5 million during 2020.
Other Debt
Warrants
The following table summarizes information related to our equity-classified stock warrant issuances as of and for the dates and periods noted:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price Per Share | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at December 31, 2020 | 4,000 | | | $ | 100.00 | | | | | |
Granted 1 | 1,007,441 | | | 39.90 | | | | | |
| Exercised | — | | | — | | | | | |
| Forfeited, cancelled or expired | — | | | | | | | |
| Outstanding at December 31, 2021 | 1,011,441 | | | $ | 40.10 | | | 4.7 | | $ | — | |
| Granted | — | | | — | | | | | |
| Exercised | — | | | — | | | | | |
| Forfeited, cancelled or expired | — | | | — | | | | | |
| Outstanding at December 31, 2022 | 1,011,441 | | | $ | 40.10 | | | 3.7 | | $ | — | |
The following table presents debt (in thousands) as of:1 | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| MGG loan | $ | 0 | | | $ | 12,025 | |
| Loans payable, current | 0 | | | 12,025 | |
| | | |
| Private lender loan due December 2023 | 1,000 | | | 0 | |
| PPP loan due April 2022 | 425 | | | 0 | |
| Loans payable, long-term | $ | 1,425 | | | $ | 0 | |
MGG LoanShare-Based Compensation
On September 2, 2022, we issued 125,000 shares of our common stock with a fair value of $0.5 million to a vendor in exchange for services performed.
We were a partyare authorized to issue equity-based awards under our 2014 Incentive Plan, our 2017 Incentive Plan and our 2022 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 financing agreement dated asformal 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 September 24, 2015 (as amended, the “Financing Agreement”)plans, we have granted shares of restricted stock and options to purchase common stock to our officers and employees with certainexercise prices equal to or greater than the fair value of our subsidiaries as borrowers (together with Remark, the “Borrowers”), certain of our subsidiaries as guarantors,underlying shares on the lenders from time to time party thereto (the “MGG Lenders”) and MGG Investment Group LP, in its capacity as collateral agent and administrative agent for the MGG Lenders (“MGG”), pursuant to which the MGG Lenders extended credit to the Borrowers consisting of a term loan in the aggregate principal amount of $35.5 million (the “MGG Loan”).grant date.
On May 15, 2019,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 completedissue any shares of our common stock resulting from such exercise from new authorized and unallocated shares available at the saletime of all of the issued and outstanding membership interests of Vegas.com (the “VDC Transaction”) and used the cash proceeds of $30 million to pay amounts due under the Financing Agreement, of which approximately $10 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.exercise.
Loan due April 2022
On April 15, 2020, we entered into a loan agreement (the “PPP Loan”) withWe estimate the fair value of our bank understock option awards and China Cash Bonuses using 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 1 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. We continue to evaluate and monitor the requirements of the CARES Act that allow for forgiveness. As of December 31, 2020, the SBA loan had an outstanding principal balance of $0.4 million included in loans payable.
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.
Accrued interest expense related to the PPP Loan and the Private Lender Loan forBSM Model. During the year ended December 31, 2020 was not material.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Expected term in years | 6.0 | | 6.0 |
| Expected volatility | 101.27 | % | | 85 | % |
| Expected dividends | — | % | | — | % |
| Risk-free interest rate | 3.56 | % | | 0.40 | % |
NOTE 16. COMMITMENTS AND CONTINGENCIES
At December 31, 2020, 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.
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.
Contingencies
CBG Litigation
As ofDuring the year ended December 31, 2020,2021 (we did not issue any China Cash Bonuses during 2022), we were neither a defendantapplied the following weighted-average inputs, which we classify 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.
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 rescissionLevel 3 of the purchase agreement relatingfair value hierarchy, 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 allowingBSM Model 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.our China Cash Bonuses:
| | | | | | | |
| | | |
| | | |
| Expected remaining term in years | | | 4.71 |
| Expected volatility | | | 110.14 | % |
| Expected dividends | | | — | % |
| Risk-free interest rate | | | 1.06 | % |
We entered into a settlement agreement with Mr. Roseman to settle all claims against him,estimated the expected term based upon historical data. The risk-free interest rate is based on the U.S. Treasury yield curve appropriate for the expected term on the date of grant, and we dismissed those claims on May 13, 2019. We entered into a Stipulation for Settlement dated January 15, 2019 with CBG andestimate the JOLs, which sets forthexpected volatility primarily using 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 shareshistorical volatility of our common stock at a per-share exercise price of $6.00, which warrants are exercisable for a period of 5 yearsstock. Actual compensation, if any, ultimately realized may differ significantly from the dateamount estimated using an option-pricing model.
The following table summarizes activity under our equity incentive plans related to equity-classified stock option grants as 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 otherdates 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 wasperiods noted:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price Per Share | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at December 31, 2020 | 994,234 | | | $ | 42.90 | | | | | |
| Granted | 546,350 | | | 13.70 | | | | | |
| Exercised | (54,794) | | | 19.70 | | | | | |
| Forfeited, cancelled or expired | (1,888) | | | 15.50 | | | | | |
| Outstanding at December 31, 2021 | 1,483,902 | | | $ | 33.00 | | | 6.1 | | $ | 159 | |
| Granted | 152,731 | | | 2.66 | | | | | |
| Exercised | — | | | — | | | | | |
| Forfeited, cancelled or expired | (10,002) | | | 14.11 | | | | | |
| Outstanding at December 31, 2022 | 1,626,631 | | | $ | 30.31 | | | 5.5 | | $ | 1 | |
| | | | | | | |
| Exercisable at December 31, 2021 | 1,277,652 | | | 36.20 | | | 5.7 | | $ | 957 | |
| Exercisable at December 31, 2022 | 1,549,681 | | | 31.41 | | | 5.3 | | $ | 1 | |
filed withThe following table summarizes the Grand Court on December 3, 2019. One month later, on or about January 2, 2020, the Grand Court approved the application, authorizing CBGstatus of non-vested stock options as of and the JOLs to enter into the settlement. Counsel for the parties are currently finalizing the settlement agreement.dates and periods noted: | | | | | | | | | | | |
| Shares | | Weighted-Average
Grant-Date Fair Value |
| Non-vested at December 31, 2020 | 16,088 | | | $ | 68 | |
| | | |
| Vested | (354,788) | | | 3,512 | |
| Forfeited, cancelled or expired | (1,400) | | | 17 | |
| Non-vested at December 31, 2021 | 206,250 | | | 2,063 | |
| Granted | 37,000 | | | 51 | |
| Vested | (160,100) | | | 1,852 | |
| Forfeited, cancelled or expired | (6,200) | | | 72 | |
| Non-vested at December 31, 2022 | 76,950 | | | $ | 529 | |
OtherNo stock options were exercised during year ended December 31, 2022. We received proceeds from stock option exercises during the year ended December 31, 2021 totaling approximately $1.1 million, while the total intrinsic value on such stock option exercises was $1.0 million.
The following table summarizes activity related to our liability-classified China Cash Bonuses as of and for the dates and periods noted:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price Per Share | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at December 31, 2020 | 105,500 | | | $ | 40.10 | | | | | |
| Granted | — | | | — | | | | | |
| | | | | | | |
| Forfeited, cancelled or expired | (1,900) | | | 63.10 | | | | | |
| Outstanding at December 31, 2021 | 103,600 | | | $ | 39.70 | | | 6.1 | | $ | 159 | |
| | | | | | | |
| | | | | | | |
| Forfeited, cancelled or expired | (32,150) | | | 47.99 | | | | | |
| Outstanding at December 31, 2022 | 71,450 | | | $ | 35.99 | | | 6.1 | | $ | — | |
| | | | | | | |
| Exercisable at December 31, 2021 | 88,600 | | | 44.10 | | | 4.9 | | $ | — | |
| Exercisable at December 31, 2022 | 68,450 | | | 36.97 | | | 6.1 | | $ | — | |
We are also regularly subject to claims, suits, regulatory and government investigations,
The following table presents the change in the liability associated with our China Cash Bonuses included in Accrued expense and other proceedings. Such claims, suits, regulatory and government investigations, and other proceedings could result in substantial fines and penalties, injunctive relief, ongoing auditing and monitoring obligations, changes to our products and services, alterations to our business models and operations, and collateral related civil litigation or other adverse consequences, all of which could harm our business, reputation, financial condition, and operating results.current liabilities (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Balance at beginning of period | $ | 439 | | | $ | 679 | |
| Share-based compensation expense related to China Cash Bonuses | (407) | | | (240) | |
| Balance at end of period | $ | 32 | | | $ | 439 | |
With respectOn July 27, 2020, the compensation committee of our board of directors approved grants to employees, directors and other service providers, excluding our CEO, of 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 outstanding matters, basedAmended 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.
On July 8, 2021, 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 current knowledge,common stock, we believedetermined that July 8, 2021 was the amount or rangegrant date for accounting purposes of reasonably possible loss will not, either individually orthe stock options we originally issued on July 27, 2020. The grant date fair value of the options granted on July 27, 2020 was approximately $6.3 million. To estimate the fair value of the options with an accounting grant date of July 8, 2021, we used the Black-Scholes-Merton option pricing model with an expected volatility of 85%, a risk-free interest rate of 0.34%, and expected term of six years and no expected dividends.
The following table presents a breakdown of share-based compensation cost included in aggregate, have a material adverse effectoperating expense (in thousands): | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
| Stock options | $ | 2,104 | | | $ | 4,300 | | | |
| China Cash Bonuses | (407) | | | (240) | | | |
| Total | $ | 1,697 | | | $ | 4,060 | | | |
We record share-based compensation expense in the books of the subsidiary that incurs the expense, while for equity-classified stock options we record the change in additional paid-in capital on our business, consolidated financial position, results of operations, or cash flows. However, the outcome ofcorporate entity because the corporate entity’s equity underlies such matters is inherently unpredictablestock options.
The following table presents information regarding unrecognized share-based compensation cost associated with stock options and subject to significant uncertainties.China Cash Bonuses: | | | | | |
| December 31, 2022 |
| Unrecognized share-based compensation cost for non-vested awards (in thousands): | |
| Stock options | 198 | |
| China Cash Bonuses | — | |
| Weighted-average years over which unrecognized share-based compensation expense will be recognized: | |
| Stock options | 1.1 |
| China Cash Bonuses | 0.1 |
NOTE 17.18. RELATED PARTY TRANSACTIONS
On July 27, 2020,As of December 31, 2022, we collectedowed approximately $0.5$1.2 million to members of receivables from related parties. The receivables represented cash advances in excessmanagement representing various operating expense payments made on our behalf. Approximately $0.4 million was repaid during the first quarter of expense reimbursements to senior management. The cash received from these receivables was subsequently injected as additional capital into our VIEs in China.2023.
NOTE 19. CHINA BUSINESS PARTNER
We interact with an unrelated entity (the “China Business Partner”) in more than one capacity. First, since 2020, we have been working with the China Business Partner to earn revenue by obtaining business from some of the largest companies in China. Secondly, prior to the year ended December 31, 2022, our artificial intelligence business in the U.S. purchased substantially all of its inventory from a subsidiary of the China Business Partner which manufactures certain equipment to our
specifications; during the year ended December 31, 2022, we did not make any inventory purchases. In addition, a member of our senior leadership team maintains a role in the senior management structure of the China Business Partner.
During the year ended December 31, 2020, we advanced $1.5 million to the China Business Partner pursuant to an agreement between the two entities. Under the executed agreement, we had an obligation to advance as much as an aggregate amount of $5.1 million over the loan term of five years, and we could elect to convert amounts due to us under the agreement into equity of the China Business Partner upon any equity financing the China Business Partner undertook during the term of the agreement. The business purpose for the advances was to allow the China Business Partner to purchase and modify hardware to integrate with our software and market such integrated product to potential customers, including some of the largest companies in China.
During the year ended December 31, 2021, we advanced another $2.4 million to the China Business Partner pursuant to the agreement entered into in 2020. We initially determined that such advances by the VIE were effectively marketing costs because realizability of the advanced amounts was uncertain given the lack of a formalized business relationship with the China Business Partner and the nature of the use of funds. As a result, we initially recorded the advances to our China Business Partner in Sales and marketing expense.
As of December 31, 2021, as a result of the China Business Partner’s repayment on January 25, 2022 of the $3.9 million we advanced to it, we recorded such amount in Other receivables, with $2.4 million of the repayment reducing sales and marketing expense for the 2021 advances and $1.5 million of the repayment shown as a recovery of marketing expense initially incurred during 2020 related to that year’s advances.
Also, for the years ended December 31, 2022 and 2021, we recognized approximately $5.4 million and $3.8 million of revenue from the relationship with the China Business Partner. At December 31, 2022 and 2021, in addition to the outstanding accounts receivable balances from the China Business Partner described in Note 6, we had outstanding accounts payable to the China Business Partner of $0.7 million and $0.8 million, respectively.
NOTE 18.20. SUBSEQUENT EVENTS
Letter Agreement with Ionic
On January 5, 2023, we and Ionic entered into a letter agreement (the “Letter Agreement”) which amended the ELOC Purchase Agreement. Under the Letter Agreement, the parties agreed, among other things, to (i) amend the floor price below which Ionic will not be required to buy any shares of our common stock under the ELOC Purchase Agreement from $0.25 to $0.20, determined on a post-reverse split basis, (ii) amend the per share purchase price for purchases under the ELOC Purchase Agreement to 90% of the average of the two lowest daily VWAPs over a specified measurement period, which will commence at the conclusion of the applicable measurement period related to the 2022 Debenture and (iii) waive certain requirements in the ELOC Purchase Agreement to allow for a one-time $0.5 million purchase under the ELOC Purchase Agreement.
As partial consideration for the waiver to allow for the $0.5 million purchase by Ionic, Remark agreed to issue to Ionic that number of shares equal to the difference between (x) the variable conversion price in the 2022 Debenture, and (y) the calculation achieved as a result of the following formula: 80% (or 70% if our common stock is not then trading on Nasdaq) of the lowest VWAP starting on the trading day immediately following the receipt of pre-settlement conversion shares following the date on which the 2022 Debenture automatically converts or other relevant date of determination and ending the later of (a) 10 consecutive trading days after (and not including) the Automatic Conversion Date (as defined in the ELOC Agreement) or such other relevant date of determination and (b) the trading day immediately after shares of our common stock in the aggregate amount of at least $13.9 million shall have traded on Nasdaq.
Note PayableIssuances of Shares to Ionic
On February 10, 2021,January 19, 2023, we entered intodetermined the final number of Settlement Shares related to the conversion of the 2022 Debenture to be 3,129,668. We had already issued 898,854 Settlement Shares during the year ended December 31, 2022, and during the quarter ended March 31, 2023, we issued another 2,094,428 Settlement Shares, resulting in 136,386 Settlement Shares yet to be issued to Ionic as of March 31, 2023. The difference between the $1.9 million fair value of the liability at December 31, 2022 and the $0.2 million fair value of the liability at March 31, 2023 will be reflected as a senior secured promissory note (the “Note”) with certainfinance cost 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 loanapproximately $1.7 million 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 performance2023 statement 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.operations.
Common Stock Issuances
From February 3, 2021 through February 5, 2021, we issued approximately 0.4 million shares of our common stock as a result of stock option exercises.
New Convertible Subordinated Debentures
On March 14, 2023, we entered into a debenture purchase agreement (the “2023 Debenture Purchase Agreement”) with Ionic pursuant to which we authorized the issuance and sale of two convertible subordinated debentures in the aggregate principal amount of $2.8 million for an aggregate purchase price of $2.5 million. The first debenture is in the original principal amount of $1.7 million for a purchase price of $1.5 million (the “First Debenture”), which was issued on March 14, 2023, and the second debenture is in the original principal amount of $1.1 million for a purchase price of $1.0 million (the “Second Debenture” and collectively with the First Debenture, the “2023 Debentures”), which was issued on April 12, 2022.
The 2023 Debentures accrue interest at a rate of 10% per annum, of which two years of interest is guaranteed and deemed earned in full on the first day following the issuance date. The interest rate on the 2023 Debentures increases to a rate of 15% per annum if the 2023 Debentures are not fully paid, converted or redeemed by the second anniversary of each debenture (each, a “Maturity Date”) or upon the occurrence of certain trigger events, including, but not limited to, the suspension from trading or the delisting of our common stock from the Nasdaq Capital Market (“Nasdaq”) for three consecutive trading days. If the 2023 Debentures are not fully paid or converted by their respective Maturity Dates, the original aggregate principal amount of the 2023 Debentures will be deemed to have been $3.3 million from their issuance dates.
The 2023 Debentures automatically convert into shares of common stock at the earlier of (i) the effectiveness of the initial registration statement registering the resale of certain Registrable Securities as such term is defined in the Registration Rights Agreement (as defined below) including, without limitation, the shares issuable upon conversion of the 2023 Debentures (the “Conversion Shares”) (such registration statement, the “Resale Registration Statement”), and (ii) 181 days after the issuance date of each 2023 Debenture. The number of shares of common stock issuable upon conversion of each 2023 Debenture shall be determined by dividing the outstanding balance under each 2023 Debenture (including all accrued and unpaid interest and accrued and unpaid late charges, if any) by a conversion price that is the lower of (x) 80% (or 70% if our common stock is not then trading on Nasdaq) of the average of the two lowest VWAPs over a specified measurement period following the conversion date (the “Variable Conversion Price”), and (y) $1.40 (the “Fixed Conversion Price”), subject to full ratchet anti-dilution protection in the event we issue certain equity securities at a price below the then Fixed Conversion Price. The 2023 Debentures are unsecured and expressly junior to any of our existing or future debt obligations. Notwithstanding anything to the contrary, under no circumstances shall the Variable Conversion Price be less than the floor price of $0.20 as specified in the 2023 Debentures. Additionally, in the event of a bankruptcy, we are required to redeem the 2023 Debentures in cash in an amount equal to the then outstanding balance of the 2023 Debentures multiplied by 120%. The 2023 Debentures further provide that we will not effect the conversion of any portion of the 2023 Debentures, and the holder thereof will not have the right to a conversion of any portion of the 2023 Debentures, to the extent that after giving effect to such conversion, the holder together with its affiliates would beneficially own more than 4.99% of the outstanding shares of our common stock immediately after giving effect to such conversion. Furthermore, we may not issue shares of common stock underlying the 2023 Debentures if such issuance would require us to obtain stockholder approval under the Nasdaq rules or until such stockholder approval has been obtained.
Concurrently with entering into the 2023 Debenture Purchase Agreement, we also entered into a registration rights agreement with Ionic (the “2023 Registration Rights Agreement”), in which we agreed to file with the SEC one or more registration statements, as necessary, and to the extent permissible and subject to certain exceptions, to register under the Securities Act of 1933, as amended, the resale of the shares of our common stock issuable upon conversion of the 2023 Debentures and the shares of common stock that may be issued to Ionic if we fail to comply with our obligations in the 2023 Registration Rights Agreement. The 2023 Registration Rights Agreement requires that we file, within 15 calendar days after we file our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Resale Registration Statement and use commercially reasonable efforts to have the Resale Registration Statement declared effective by the SEC on or before the earlier of (i) 90 days after signing of the 2023 Registration Rights Agreement (or 120 days if such registration statement is subject to full review by the SEC) and (ii) the 2nd business day after we are notified we will not be subject to further SEC review. If we fail to file or have the Resale Registration Statement declared effective by the specified deadlines, then in each instance, we will issue to Ionic 150,000 shares of our common stock within two trading days after such failure, and with respect to the Conversion Shares, we will additionally pay in cash, as liquidated damages, an amount equal to 2% of the amount then currently outstanding under the 2023 Debentures for failure to file and have the Resale Registration Statement declared effective by the same deadlines set forth above for each 30-day period after each such failure.
Mudrick Note Purchase Agreement
On March 14, 2023, we also entered into a Note Purchase Agreement (the “New Mudrick Loan Agreement”) with Mudrick, pursuant to which all of the Original Mudrick Loans were cancelled in exchange for new notes payable to Mudrick (the “New Mudrick Notes”) in the aggregate principal amount of $16.2 million.
The New Mudrick Notes bear interest at a rate of 20.5% per annum, which shall be payable on the last business day of each month commencing on May 31, 2023. The interest rate will increase by 2% and the principal amount outstanding under the New Mudrick Notes and any unpaid interest thereon may become immediately due and payable upon the occurrence of any event of default under the New Mudrick Loan Agreement.
All amounts outstanding under the New Mudrick Notes, including all accrued and unpaid interest, will be due and payable in full on October 31, 2023. To secure the payment and performance of our obligations under the New Mudrick Loan Agreement, we have granted to TMI Trust Company, as the collateral agent on behalf of the holders of the New Mudrick Notes, a continuing security interest in all assets of Remark, subject to certain exceptions as set forth in the New Mudrick Loan Agreement.
In connection with our entry into the New Mudrick Loan Agreement, we agreed to an extension fee of $0.8 million, which amount was paid in kind by capitalizing it to the principal of the New Mudrick Notes. All unpaid interest which had accrued under the Original Mudrick Loan Agreement to, but not including, March 14, 2023 was capitalized to the principal of the New Mudrick Notes.
