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

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2020

https://cdn.kscope.io/919ee0a1b47964260b4eb8645549fda7-mark-20200630_g1.jpg
Commission File Number 001-33720
Remark Holdings, Inc.
Delaware33-1135689
State of IncorporationIRS Employer Identification Number

800 S. Commerce St.
Las Vegas, NV 89106

Address, including zip code, of principal executive offices

702-701-9514

Registrant’s telephone number, including area code


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

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

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

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

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

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

As of August 11, 2020, a total of 99,408,916 shares of our common stock were outstanding.



TABLE OF CONTENTS

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



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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





PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
June 30, 2020December 31, 2019
(Unaudited)
Assets
Cash and cash equivalents$10,233  $272  
Trade accounts receivable, net2,235  1,964  
Receivable from related parties531    
Prepaid expense and other current assets5,803  4,623  
Total current assets18,802  6,859  
Property and equipment, net156  341  
Operating lease assets470  4,359  
Investment in unconsolidated affiliates1,922  1,935  
Intangibles, net472  509  
Other long-term assets1,254  824  
Total assets$23,076  $14,827  
Liabilities and Stockholders’ Deficit
Accounts payable$7,709  $8,126  
Accrued expense and other current liabilities13,295  14,326  
Contract liability566  313  
Note payable2,000  3,000  
Loans payable, current  12,025  
Total current liabilities23,570  37,790  
Loans payable, long-term425    
Operating lease liabilities, long-term202  4,650  
Warrant liability6,318  115  
Total liabilities30,515  42,555  
Commitments and contingencies (Note 13)
Preferred stock,$0.001 par value; 1,000,000 shares authorized; none issued
    
Common stock, $0.001 par value; 100,000,000 shares authorized; 99,408,916 and 51,055,159 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
99  51  
Additional paid-in-capital351,417  319,275  
Accumulated other comprehensive income111  (227) 
Accumulated deficit(359,066) (346,827) 
Total stockholders’ deficit(7,439) (27,728) 
Total liabilities and stockholders’ deficit$23,076  $14,827  
See Notes to Unaudited Condensed Consolidated Financial Statements
1
Financial Statement Index

REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(dollars in thousands, except per share amounts)
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Revenue$2,299  $2,865  $2,730  $4,074  
Cost and expense
Cost of revenue (excluding depreciation and amortization)1,210  1,541  1,231  3,134  
Sales and marketing486  687  902  1,546  
Technology and development1,477  854  2,125  2,158  
General and administrative1,898  2,454  4,638  5,431  
Depreciation and amortization66  260  156  585  
Other operating expense      6  
Total cost and expense5,137  5,796  9,052  12,860  
Operating loss(2,838) (2,931) (6,322) (8,786) 
Other income (expense)
Interest expense(775) (553) (1,236) (940) 
Other income, net57  92  57  47  
Change in fair value of warrant liability(6,260) 2,078  (6,203) 662  
Gain on lease termination    1,538    
Other loss, net  27  (73) 1  
Total other income (expense), net(6,978) 1,644  (5,917) (230) 
Loss from continuing operations before income taxes(9,816) (1,287) (12,239) (9,016) 
Benefit from income taxes        
Loss from continuing operations(9,816) (1,287) (12,239) (9,016) 
Loss from discontinued operations, net of tax (Note 17)
  (1,487)   (2,610) 
Net loss$(9,816) $(2,774) $(12,239) $(11,626) 
Other comprehensive income (loss)
Foreign currency translation adjustments156  127  338  33  
Comprehensive loss$(9,660) $(2,647) $(11,901) $(11,593) 
Weighted-average shares outstanding, basic and diluted89,264  43,335  71,527  39,994  
Net loss per share, basic and diluted
Continuing operations$(0.11) $(0.03) $(0.17) $(0.23) 
Discontinued operations  (0.03)   (0.07) 
Consolidated$(0.11) $(0.06) $(0.17) $(0.30) 
See Notes to Unaudited Condensed Consolidated Financial Statements
2
Financial Statement Index

REMARK HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Deficit
(in thousands, except number of shares)
Three Months Ended June 30, 2020
Common Stock SharesCommon Stock Par ValueAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Balance at March 31, 202066,133,888  $66  $323,958  $(45) $(349,250) (25,271) 
Net loss—  —  —  —  (9,816) (9,816) 
Share-based compensation—  —  47  —  —  47  
Common stock issued33,220,164  33  27,345  —  —  27,378  
Equity instrument exercises54,864  —  67  —  —  67  
Other—  —  —  156  —  156  
Balance at June 30, 202099,408,916  $99  $351,417  $111  $(359,066) $(7,439) 
Three Months Ended June 30, 2019
Common Stock SharesCommon Stock Par ValueAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Balance at March 31, 201940,722,229  $41  $310,618  $(62) $(330,065) $(19,468) 
Net loss—  —  —  —  (2,774) (2,774) 
Share-based compensation—  —  216  —  —  216  
Common stock issued5,407,930  5  4,995  —  —  5,000  
Other—  —  —  127  —  127  
Balance at June 30, 201946,130,159  $46  $315,829  $65  $(332,839) $(16,899) 
Six Months Ended June 30, 2020
Common Stock SharesCommon Stock Par ValueAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Balance at December 31, 201951,055,159  $51  $319,275  $(227) $(346,827) $(27,728) 
Net loss—  —  —  —  (12,239) (12,239) 
Share-based compensation—  —  93  —  —  93  
Common stock issued48,298,893  48  31,982  —  —  32,030  
Equity instrument exercises54,864  —  67  —  —  67  
Other—  —  —  338  —  338  
Balance at June 30, 202099,408,916  $99  $351,417  $111  $(359,066) $(7,439) 
Six Months Ended June 30, 2019
Common Stock SharesCommon Stock Par ValueAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Balance at December 31, 201839,053,312  $39  $308,018  $32  $(321,213) $(13,124) 
Net loss—  —  —  —  (11,626) (11,626) 
Share-based compensation—  —  314  —  —  314  
Common stock issued7,074,597  7  7,493  —  —  7,500  
Equity instrument exercises2,250  —  4  —  —  4  
Other—  —  —  33  —  33  
Balance at June 30, 201946,130,159  $46  $315,829  $65  $(332,839) $(16,899) 



3
Financial Statement Index

REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
Six Months Ended June 30,
20202019
Net cash used in continuing operating activities
$(9,247) $(7,496) 
Net cash provided in discontinued operating activities
  (7,159) 
Net cash used in operating activities
(9,247) (14,655) 
Cash flows from investing activities:
Proceeds from sale of business
  30,000  
Purchases of property, equipment and software
(9) (2) 
Payment of payroll costs capitalized to software in progress
  (127) 
Net cash provided by (used in) continuing investing activities
(9) 29,871  
Net cash used in discontinued investing activities
  (18,396) 
Net cash used in investing activities
(9) 11,475  
Cash flows from financing activities:
Proceeds from issuance of common stock, net
32,073  7,504  
Proceeds from debt issuance
425    
Payment of loan fees and debt issuance cost
  (2,275) 
Repayments of debt
(13,281) (25,526) 
Net cash provided by financing activities
19,217  (20,297) 
Net change in cash, cash equivalents and restricted cash
9,961  (23,477) 
Cash, cash equivalents and restricted cash:
Beginning of period, including cash in disposal group
272  25,548  
End of period
$10,233  $2,071  
Supplemental cash flow information:
Cash paid for interest
$833  $2,211  
Supplemental schedule of non-cash investing and financing activities:
Capitalization of interest to debt principal
$256  $171  
Increase in loan payable
$  $1,103  
See Notes to Unaudited Condensed Consolidated Financial Statements
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REMARK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1. ORGANIZATION AND BUSINESS

Organization and Business

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

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


COVID-19

Our unaudited condensed consolidated interim financial statements for the three and six months ended June 30, 2020 were impacted by the effects of the global outbreak of a novel strain of coronavirus, or COVID-19, as national and local governmental authorities in China and the U.S., where we operate, have placed significant restrictions on travel and other activities within their respective countries, leading to extended business closures. The restrictions and resulting business closures have limited our operational capabilities, which could have a material adverse impact on our business and which have created significant uncertainties, such as the potential adverse effect of the pandemic on the economy, our vendors, our employees and customers and customer sentiment in general.

The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration and severity of the outbreak, 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 are highly uncertain and cannot be predicted. The pandemic-related situation is changing rapidly, and additional impacts of which we are not currently aware may arise. 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 crowds and areas of high foot traffic for indications that certain persons may require secondary screening. We have begun sales efforts primarily in the U.S., as well as in other countries.

 
Going Concern
 
During the six months ended June 30, 2020, and in each fiscal year since our inception, we have incurred net losses which have resulted in an accumulated deficit of $359.1 million as of June 30, 2020. Additionally, our operations have historically used more cash than they have provided. Net cash used in continuing operating activities was $9.2 million during the six months ended June 30, 2020. As of June 30, 2020, our cash and cash equivalents balance was $10.2 million, and we had a negative working capital balance of $4.8 million.

On March 3, 2020, we entered into a common stock purchase agreement, later amended on April 9, 2020 (as amended, the “2020 Aspire Purchase Agreement”), 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, which we describe in more detail in Note 14, terminated and replaced the common stock purchase agreement we had entered into with Aspire Capital on March 29, 2019 (the “2019 Aspire Purchase Agreement”).

Concurrently with entering into the 2020 Aspire Purchase Agreement, we also entered into a registration rights agreement with Aspire Capital, in which we agreed to file with the Securities and Exchange Commission (the “SEC”) one or more registration statements, as necessary, and to the extent permissible and subject to certain exceptions, to register under the
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Financial Statement Index


Securities Act of 1933, as amended, the sale of the shares of our common stock that may be issued to Aspire Capital under the 2020 Aspire Purchase Agreement. We have filed with the SEC a prospectus supplement to our effective shelf Registration Statement on Form S-3 (File No. 333-225448) registering all of the shares of common stock that may be offered to Aspire Capital from time to time under the 2020 Aspire Purchase Agreement.

As of June 30, 2020, we have issued to Aspire Capital a total of 44,227,890 shares of our common stock under the 2020 Aspire Purchase Agreement. During the six months ended June 30, 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 approximately $32.0 million plus Aspire Capital’s commitment to participate in the 2020 Aspire Purchase Agreement.

Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities give rise to substantial doubt regarding our ability to continue as a going concern.

We intend to fund our future operations and meet our financial obligations through revenue growth in our Technology and Data Intelligence segment, as well as through sales of our thermal-imaging products. We cannot, however, provide assurance that revenue, income and cash flows generated from our businesses will be sufficient to sustain our operations in the twelve months following the filing of this Form 10-Q. As a result, we are actively evaluating strategic alternatives including debt and equity financings and potential sales of investment assets or operating businesses.

Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (in particular, in response to the COVID-19 pandemic), will play primary roles in determining whether we can successfully obtain additional capital. We cannot be certain that we will be successful at raising additional capital.

A variety of factors, many of which are outside of our control, affect our cash flow; those factors include the effects of the COVID-19 pandemic, regulatory issues, competition, financial markets and other general business conditions. Based on financial projections, we believe that we will be able to meet our ongoing requirements for at least the next 12 months with existing cash, cash equivalents and cash resources, and based on the probable success of one or more of the following plans:

develop and grow new product line(s)

monetize existing assets

obtain additional capital through debt and/or equity issuances.

However, projections are inherently uncertain and the success of our plans is largely outside of our control. As a result, there is substantial doubt regarding our ability to continue as a going concern, and we may fully utilize our cash resources prior to August 14, 2021.


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of June 30, 2020, with the audited Consolidated Balance Sheet amounts as of December 31, 2019 presented for comparative purposes, and the related unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss, the Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Stockholders’ Deficit in accordance with the instructions for Form 10-Q. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.

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

Management believes that we have included all adjustments (including those of a normal, recurring nature) considered necessary to fairly present our unaudited Condensed Consolidated Balance Sheet and our unaudited Condensed Consolidated Statement of Stockholders’ Deficit, each as of June 30, 2020, as well as our unaudited Condensed Consolidated Statements of
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Financial Statement Index


Operations and Comprehensive Loss and Condensed Consolidated Statements of Cash Flows for all periods presented. You should read our unaudited condensed consolidated interim financial statements and footnotes in conjunction with our consolidated financial statements and footnotes included within the Annual Report on Form 10-K (the “2019 Form 10-K”).


Consolidation

We include all of our subsidiaries, which include the variable-interest entities (“VIEs”) for which we are the primary beneficiary, in our condensed 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.

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

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, intangible assets, the useful lives of property and equipment, share-based compensation, the fair value of the warrant liability, income taxes, inventory reserve and purchase price allocation, among other items.

As of June 30, 2020, 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.


Recently Issued Accounting Pronouncements

We have reviewed all recently issued accounting pronouncements. The pronouncements that we have already adopted, did not have a material effect on our financial condition, results of operations, cash flows or reporting thereof, we do not believe that any of the 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. REVENUE

During the three months ended June 30, 2020, we began selling our thermal imaging products, primarily in the U.S., under our bio-safety business.

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Financial Statement Index


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.

Our Remark AI rPad thermal imaging devices, usually mounted on a wall or a single-post stand, are designed for customers needing the ability to scan individuals on a one-by-one basis in situations where rapid, high-volume scanning is not necessary, such as at a customer’s office entrances where employees can be scanned as they enter for indications of an elevated temperature that may require secondary screening. In addition to thermal scanning, we can customize our AI software embedded in the rPad to perform additional safety and security functions including identifying persons for authorized entry.

We have also developed the Remark AI Thermal Helmet which can, for example, be worn by security personnel at large gatherings allowing for a mobile thermal scanning ability.

In addition to our kits, pads and helmets, we sell extended warranties and also maintenance and support plans. Under our warranties and our maintenance and support plans, we stand-ready over the period specified in the contract to repair the hardware sold to the customer or provide support for or upgrade the software as new versions are released.

For our kits, pads and helmets, we recognize the associated revenue at the point in time that the customer takes control of the product, while we recognize revenue related to our warranties and our maintenance and support plans over the period of time we have agreed to stand ready to perform the obligations related to such warranties or plans.

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


Disaggregation of Revenue

The following table presents a disaggregation of our revenue by major category (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
AI-based products and services$2,053  $2,466  $2,377  $2,890  
Advertising and other246  399  353  1,184  
Revenue$2,299  $2,865  $2,730  $4,074  


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.


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Financial Statement Index


Contract Assets and Contract Liabilities

We do not currently generate material contract assets. During the six months ended June 30, 2020, our contract liability changed only as a result of routine business activity.

During the six months ended June 30, 2020 and 2019, we did not recognize material amounts of revenue which were included in the beginning balance of Contract liability at January 1, 2020 and 2019, respectively.

During the six months ended June 30, 2020 and 2019, we did not recognize revenue from performance obligations within the scope of ASC 606 that were satisfied in previous periods.


NOTE 4. FAIR VALUE MEASUREMENTS

Liabilities Related to Warrants to Purchase Common Stock

At the end of each reporting period, we use the Monte Carlo Simulation model to estimate and report the fair value of liabilities related to certain outstanding warrants to purchase common stock. As of June 30, 2020, our outstanding liability-classified warrants include the warrants we issued or that we are obligated to issue as part of the consideration for our acquisition (the “CBG Acquisition”) of assets of China Branding Group Limited (“CBG”) in September 2016 (the “CBG Acquisition Warrants”) and warrants we issued as a result of an amendment to the Financing Agreement (as defined in Note 12) related to the acquisition (the “CBG Financing 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:
June 30,December 31,
20202019
CBG Financing Warrants
Expected volatility85.00 %85.00 %
Risk-free interest rate0.18 %1.60 %
Expected remaining term (years)0.230.73
CBG Acquisition Warrants
Expected volatility75.00 %75.00 %
Risk-free interest rate0.23 %1.65 %
Expected remaining term (years)3.233.72


In addition to the quantitative assumptions above, we also consider whether we would issue additional equity and, if so, the price per share of such equity. At June 30, 2020, we estimated that no equity financing events would potentially occur within the subsequent twelve months.

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Financial Statement Index


Our estimate of expected volatility and our stock price tend to have the most significant impact on the estimated fair value of the CBG Financing Warrants and the CBG Acquisition Warrants. We determined that, for the three months ended June 30, 2020, adding or subtracting five percentage points with regard to our estimate of expected volatility, or increases or decreases in our stock price of five percent, would not have resulted in changes to our estimates of fair value, except as follows:
IncreaseDecrease
Change in volatility
CBG Financing Warrants$130  $130  
CBG Acquisition Warrants460  405  
Change in stock price
CBG Financing Warrants$660  $595  
CBG Acquisition Warrants290  230  


The following table presents the change in the liability balance associated with our liability-classified warrants (in thousands):
Six Months Ended June 30,
Year Ended December 31,
20202019
Balance at beginning of period
$115  $1,383  
Increase (decrease) in fair value
6,203  (1,268) 
Balance at end of period
$6,318  $115  


Contingent Consideration Issued in Business Acquisition

We used the discounted cash flow valuation technique to estimate the fair value of the liability related to certain cash payments stipulated in 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.

The following table presents the change during the six months ended June 30, 2020 in the balance of the liability associated with the Earnout Payments (in thousands):
Balance at beginning of period
$1,086  
Interest accrued on unpaid balance
34  
Balance at end of period
$1,120  


On the Condensed Consolidated Balance Sheets, we included the liability for contingent consideration as a component of Accrued expense and other current liabilities.


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Financial Statement Index


NOTE 5. TRADE ACCOUNTS RECEIVABLE
June 30, 2020December 31, 2019
Gross accounts receivable balance$4,465  $4,171  
Allowance for bad debt(2,230) (2,207) 
Accounts receivable, net$2,235  $1,964  


Generally, it is not unusual for Chinese entities to pay their vendors on longer timelines than the timelines typically observed in U.S. commerce. Trade receivables related to our China-based AI projects (exclusive of certain financial technology (“FinTech”) services we provided) represent 55% of our gross trade receivables. Most of our remaining gross trade receivables balance resulted from the FinTech service, which we have discontinued.


NOTE 6. INVESTMENT IN UNCONSOLIDATED AFFILIATES

In 2009, we co-founded a U.S.-based venture, Sharecare, to build a web-based platform that simplifies the search for health and wellness information. The other co-founders of Sharecare were Dr. Mehmet Oz, HARPO Productions, Discovery Communications, Jeff Arnold and Sony Pictures Television. As of June 30, 2020, we owned approximately 4.5% of Sharecare’s issued stock and maintained representation on its Board of Directors.

During June 2018, one of our consolidated VIEs acquired a 20% interest in AIO, a Chinese technology company which provides consulting and data services to the Chinese film industry, in exchange for $1.0 million, a portion of which was paid as of June 30, 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 determined that we will account for such transaction using the equity method of accounting. We recognize our equity in the net earnings or losses relating to AIO on a one-quarter reporting lag in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. For the three months ended June 30, 2020, the amount of our equity in AIO’s net earnings for their quarter ended March 31, 2020 was not material.


NOTE 7. PREPAID EXPENSE AND OTHER CURRENT ASSETS

The following table presents the components of prepaid expense and other current assets (in thousands):
June 30, 2020December 31, 2019
Other receivables
$3,608  $3,712  
Prepaid expense
448  633  
Deposits
10  7  
Inventory, net
1,355    
Other current assets
382  271  
Total
$5,803  $4,623  


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Financial Statement Index


NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands, except estimated lives):
Estimated Life
(Years)
June 30, 2020December 31, 2019
Computers and equipment3987  989  
Furniture and fixtures347  23  
Software34,872  4,896  
Leasehold improvements1011  114  
Total property, equipment and software$5,917  $6,022  
Less accumulated depreciation(5,761) (5,681) 
Total property, equipment and software, net$156  $341  


For the six months ended June 30, 2020 and 2019, depreciation (and amortization of software) expense was $0.1 million and $0.4 million, respectively.



NOTE 9. LEASES

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

The following table presents the detail of our lease expense, net of sublease income, which is reported in General and administrative expense (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Operating lease expense
$83  $385  $471  $703  
Short-term lease expense
47  98  122  164  
Less: Sublease income
  (78)   (78) 
Lease expense
$130  $405  $593  $789  


We reported within continuing operating cash flows for the six months ended June 30, 2020 and 2019, $0.1 million and $0.9 million, respectively, of cash paid for amounts included in the measurement of operating lease liabilities.

As of June 30, 2020, our operating leases had a weighted-average remaining lease term of approximately 14 months, and we used a weighted-average discount rate of approximately 13% to measure our operating lease liabilities.
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Financial Statement Index




Maturity of Lease Liabilities

The following table presents information regarding the maturities of our undiscounted remaining operating lease payments, with a reconciliation to the amount of the liabilities representing such payments as presented in our June 30, 2020 unaudited Condensed Consolidated Balance Sheet (in thousands):
Operating lease liabilities maturing during the next:
One year$387  
Two years149  
Three years76  
Total undiscounted cash flows$612  
Present value of cash flows$548  
Lease liabilities on balance sheet:
Short-term$346  
Long-term202  
Total lease liabilities$548  


The current portion of our operating lease liability, which we report in Accrued expense and other current liabilities on our unaudited Condensed Consolidated Balance Sheet, also includes approximately $1.5 million of estimated damages from the early termination of the lease on our former office located at 3960 Howard Hughes Parkway in Las Vegas. See Note 13 and Note 18 for more information.


Significant Judgments

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


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Financial Statement Index


NOTE 10. INTANGIBLE ASSETS

The following table summarizes intangible assets by category (in thousands):
June 30, 2020December 31, 2019
Gross AmountAccumulated
Amortization
Net AmountGross AmountAccumulated
Amortization
Net Amount
Finite-lived intangible assets
Domain names$1,256  $(911) $345  $1,256  $(874) $382  
Other intangible assets68  (68)   68  (68)   
$