Remark Holdings(MARK) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the company's financial statements and management's analysis of its financial condition and operational results Financial Statements The company's financial statements reflect significant changes due to the Vegas.com divestiture, reporting net losses and negative cash flow from operations Condensed Consolidated Balance Sheets The balance sheets show a substantial reduction in assets and liabilities primarily due to the divestiture of the Vegas.com business Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $13,984 | $44,145 | | Total Assets | $25,451 | $93,808 | | Total Current Liabilities | $35,791 | $102,581 | | Total Liabilities | $42,350 | $106,932 | | Total Stockholders' Deficit | $(16,899) | $(13,124) | - The significant decrease in total assets and liabilities is primarily due to the sale of the Vegas.com business, which was classified as a disposal group held for sale at year-end 2018[7] - The company had a negative working capital of $21.8 million as of June 30, 2019 (Current Assets of $14.0 million minus Current Liabilities of $35.8 million)[7][16] Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss The statements of operations indicate decreased revenue and a shift from net income to net loss, influenced by non-cash gains Statement of Operations Summary (in thousands, except per share amounts) | Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $2,865 | $3,887 | $4,074 | $5,713 | | Operating Loss | $(2,931) | $(6,710) | $(8,786) | $(25,815) | | Net Income (Loss) | $(2,774) | $3,379 | $(11,626) | $(10,674) | | Consolidated EPS (diluted) | $(0.06) | $0.10 | $(0.30) | $(0.33) | - Revenue from continuing operations decreased by 26% in Q2 2019 and 29% in the first six months of 2019 compared to the same periods in 2018[9] - The significant swing from net income in Q2 2018 to a net loss in Q2 2019 was largely driven by a smaller gain from the change in fair value of warrant liability ($2.1 million in Q2 2019 vs. $10.1 million in Q2 2018)[9] Unaudited Condensed Consolidated Statements of Cash Flows Cash flow statements highlight negative operating cash flow, with investing activities boosted by asset sales and financing focused on debt repayment Cash Flow Summary - Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(14,655) | $(14,247) | | Net cash provided by (used in) investing activities | $11,475 | $(1,820) | | Net cash provided by (used in) financing activities | $(20,297) | $429 | - Investing activities in H1 2019 were primarily driven by $30.0 million in proceeds from the sale of the Vegas.com business[14][21] - Financing activities in H1 2019 included $7.5 million from the issuance of common stock, which was more than offset by $25.5 million in debt repayments[14] Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the company's going concern doubts, the Vegas.com sale, debt defaults, and equity financing arrangements - The company's recurring operating losses, working capital deficiencies, negative cash flows, and ongoing events of default under its Financing Agreement raise substantial doubt about its ability to continue as a going concern[22][137] - On May 15, 2019, the company sold its Vegas.com business for $30 million, recognizing a gain of $6.5 million, with proceeds used to pay down debt, and this segment is now reported as discontinued operations[21][92] - As of June 30, 2019, the company was in default on several covenants of its Financing Agreement with MGG, including maintaining minimum cash and making required payments[68][133] - The company entered into a $30.0 million common stock purchase agreement with Aspire Capital to provide a source of funding, raising approximately $7.5 million through equity sales during H1 2019[17][79] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the strategic shift to AI, operational results impacted by FinTech discontinuation, and significant liquidity challenges raising going concern doubts Overview This overview outlines the company's strategic focus on AI and data analytics following the divestiture of its travel business - The company is a diversified global technology company focusing on AI and data-analytics solutions through its Remark AI business (KanKan) and a portfolio of digital media properties[97] - Remark AI's facial-recognition algorithms received a top ranking in the National Institute of Standards and Technology's (NIST) Wild Image Accuracy Test in June 2019[98] - The sale of Vegas.com on May 15, 2019, allowed the company to reduce debt and increase its focus on data analytics and AI technology[105] Results of Operations Operational results show a revenue decline due to discontinued FinTech services, offset by growth in AI-based products and reduced G&A expenses Revenue by Category (% of Total Revenue) | Revenue Category | H1 2019 | H1 2018 | | :--- | :--- | :--- | | FinTech services | 0% | 59% | | AI-based products and services | 71% | 21% | | Advertising and other | 29% | 20% | - The decrease in revenue for the Technology & Data Intelligence segment was due to the discontinuation of FinTech contract services following a 2018 industry-wide audit in China[112][113] - The significant decrease in General and Administrative expense for the six months ended June 30, 2019 was primarily due to a one-time $11.6 million stock-based compensation expense for the CEO in January 2018 that was not repeated[118][123] Liquidity and Capital Resources The company faces severe liquidity challenges, including recurring losses, negative working capital, and debt defaults, raising substantial doubt about its going concern - The company has a history of recurring operating losses, an accumulated deficit of $332.8 million, and a negative working capital of $21.8 million as of June 30, 2019[131] - The company is in default on its Financing Agreement due to non-compliance with several covenants, including maintaining minimum cash, and available cash is not sufficient to pay its obligations[132][133] - Management has concluded there is substantial doubt about the company's ability to continue as a going concern and may fully utilize its cash resources prior to August 9, 2020[137][141] - To fund future operations, the company plans to monetize existing assets, refinance debt, and obtain additional capital through equity issuances, including under the 2019 Aspire Purchase Agreement[141] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as per the company's filing - The company stated that this item is not applicable[146] Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of June 30, 2019, due to previously disclosed material weaknesses in internal control over financial reporting, which are currently being remediated - Management concluded that disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2019[147] - The ineffectiveness is due to material weaknesses related to insufficient review of manual journal entries, insufficient documentation for revenue recognition, and deficiencies in monitoring controls within the Technology and Data Intelligence segment[147] - The company is implementing procedural changes to remediate the weaknesses, but the changes have not been in place long enough to be evaluated for effectiveness[148] PART II - OTHER INFORMATION This section provides additional information on legal proceedings, equity sales, debt defaults, and corporate governance changes Legal Proceedings The company is involved in litigation with China Branding Group (CBG) regarding the 2016 CBG Acquisition, with a magistrate judge recommending enforcement of a settlement in the company's favor - The company initiated legal proceedings against China Branding Group (CBG) seeking rescission of the 2016 CBG Acquisition, alleging fraudulent misrepresentation[149][150] - A Stipulation for Settlement was reached in January 2019, but a dispute arose when the opposing party demanded an additional 'exchange right' not included in the original terms[151] - A magistrate judge issued a report on August 2, 2019, recommending that the court enforce the settlement as originally stipulated, which would be favorable to Remark[151] Risk Factors This section is not applicable as per the company's filing - The company stated that this item is not applicable[152] Unregistered Sales of Equity Securities and Use of Proceeds In June 2019, the company issued 1,250,000 shares of common stock to an accredited investor in a private placement, raising $1.0 million under an exemption from registration requirements - On June 19, 2019, the company issued 1,250,000 shares of common stock for $1.0 million in a private placement to an accredited investor[152] - The sale was made in reliance upon an exemption from registration requirements pursuant to Section 4(a)(2) of the Securities Act of 1933[153] Defaults Upon Senior Securities The company explicitly states it was in default on its senior secured debt as of June 30, 2019, due to non-compliance with multiple covenants in its Financing Agreement, with no waiver received - As of June 30, 2019, the company was in default of its Financing Agreement for failing to maintain a minimum of $1.0 million in unrestricted cash[154] - Additional defaults include failure to pay for a required insurance policy (Tail Policy), failure to make a final Earnout Payment, and non-compliance with procedural requirements of the Sharecare Covenant[154] - The company has not received a waiver for these events of default as of the date of the report[154] Other Information On August 6, 2019, the company's Chairman and Chief Executive Officer, Kai-Shing Tao, was also appointed as the interim principal financial officer and principal accounting officer - On August 6, 2019, Chairman and CEO Kai-Shing Tao was appointed as interim principal financial officer and principal accounting officer[155] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO and XBRL data files - Lists exhibits filed with the report, including Amendment No 6 to the Financing Agreement, Sarbanes-Oxley certifications, and XBRL data files[156]