Remark Holdings(MARK) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial information for Remark Holdings, Inc Item 1. Financial Statements This section presents Remark Holdings' unaudited condensed consolidated financial statements, including balance sheets, income statements, cash flows, and equity, with notes on accounting policies, revenue, and going concern status Condensed Consolidated Balance Sheets This section provides a snapshot of Remark Holdings' financial position, detailing assets, liabilities, and equity at specific dates - Cash and cash equivalents significantly increased from $272 thousand at December 31, 2019, to $10,233 thousand at June 30, 2020, primarily due to equity issuances[10] - Total current assets increased by 174% from $6,859 thousand to $18,802 thousand, while total current liabilities decreased by 37.7% from $37,790 thousand to $23,570 thousand, improving working capital[10] - Warrant liability saw a substantial increase from $115 thousand to $6,318 thousand, reflecting changes in fair value[10] - Total stockholders' deficit improved from $(27,728) thousand to $(7,439) thousand, indicating a reduction in the accumulated deficit[10] Condensed Consolidated Balance Sheets (in thousands) | Assets/Liabilities/Equity | June 30, 2020 (Unaudited) | December 31, 2019 | | :---------------------------------- | :------------------------ | :---------------- | | Cash and cash equivalents | $10,233 | $272 | | Total current assets | $18,802 | $6,859 | | Total assets | $23,076 | $14,827 | | Total current liabilities | $23,570 | $37,790 | | Warrant liability | $6,318 | $115 | | Total liabilities | $30,515 | $42,555 | | Total stockholders' deficit | $(7,439) | $(27,728) | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss This section details Remark Holdings' financial performance, including revenue, expenses, and net loss, for the specified periods - Revenue decreased by 19.8% for the three months ended June 30, 2020, and by 33% for the six months ended June 30, 2020, compared to the prior year periods[11] - Net loss significantly widened to $(9,816) thousand for the three months ended June 30, 2020, from $(2,774) thousand in the prior year, primarily due to a substantial negative change in the fair value of warrant liability[11] - Technology and development expenses increased by 73% for the three months ended June 30, 2020, to $1,477 thousand, while general and administrative expenses decreased by 23% to $1,898 thousand[11] Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $2,299 | $2,865 | $2,730 | $4,074 | | Total cost and expense | $5,137 | $5,796 | $9,052 | $12,860 | | Operating loss | $(2,838) | $(2,931) | $(6,322) | $(8,786) | | Total other income (expense), net | $(6,978) | $1,644 | $(5,917) | $(230) | | Loss from continuing operations | $(9,816) | $(1,287) | $(12,239) | $(9,016) | | Net loss | $(9,816) | $(2,774) | $(12,239) | $(11,626) | | Comprehensive loss | $(9,660) | $(2,647) | $(11,901) | $(11,593) | | Net loss per share, basic and diluted | $(0.11) | $(0.06) | $(0.17) | $(0.30) | Unaudited Condensed Consolidated Statements of Stockholders' Deficit This section outlines changes in Remark Holdings' equity, including common stock issuances, net loss, and accumulated deficit - The total stockholders' deficit improved from $(25,271) thousand at March 31, 2020, to $(7,439) thousand at June 30, 2020, despite a net loss of $(9,816) thousand, primarily due to significant common stock issuances[12] - Common stock shares outstanding nearly doubled from 51,055,159 at December 31, 2019, to 99,408,916 at June 30, 2020, largely from issuances under the Aspire Purchase Agreements[14] - Additional paid-in capital increased by $32,142 thousand during the six months ended June 30, 2020, reflecting proceeds from common stock issuances[14] Unaudited Condensed Consolidated Statements of Stockholders' Deficit (in thousands) | Item | Balance at March 31, 2020 | Net Loss | Share-based Compensation | Common Stock Issued | Equity Instrument Exercises | Other | Balance at June 30, 2020 | | :------------------------------------ | :------------------------ | :-------- | :----------------------- | :------------------ | :-------------------------- | :---- | :----------------------- | | Common Stock Shares | 66,133,888 | — | — | 33,220,164 | 54,864 | — | 99,408,916 | | Common Stock Par Value | $66 | — | — | $33 | — | — | $99 | | Additional Paid-In Capital | $323,958 | — | $47 | $27,345 | $67 | — | $351,417 | | Accumulated Other Comprehensive Income| $(45) | — | — | — | — | $156 | $111 | | Accumulated Deficit | $(349,250) | $(9,816) | — | — | — | — | $(359,066) | | Total | $(25,271) | $(9,816) | $47 | $27,378 | $67 | $156 | $(7,439) | Unaudited Condensed Consolidated Statements of Cash Flows This section presents Remark Holdings' cash inflows and outflows from operating, investing, and financing activities - Net cash used in continuing operating activities increased to $(9,247) thousand for the six months ended June 30, 2020, from $(7,496) thousand in the prior year, primarily due to timing of working capital payments[16][157] - Financing activities provided significant cash of $19,217 thousand in the first half of 2020, a substantial improvement from $(20,297) thousand used in the prior year, driven by $32.0 million from common stock issuances[16][159] - The company's cash, cash equivalents, and restricted cash balance at the end of the period increased to $10,233 thousand, up from $2,071 thousand in the prior year[16] Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in continuing operating activities | $(9,247) | $(7,496) | | Net cash used in operating activities | $(9,247) | $(14,655) | | Net cash used in investing activities | $(9) | $11,475 | | 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: End of period | $10,233 | $2,071 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements NOTE 1. ORGANIZATION AND BUSINESS Remark Holdings, a technology company leveraging AI, faced significant COVID-19 impacts, leading to a new biosafety product line and going concern doubts due to accumulated deficit and negative working capital - Remark Holdings is primarily a technology-focused company, utilizing its KanKan data intelligence platform for AI-based solutions in various industries and geographies[17] - The COVID-19 pandemic significantly impacted Q2 2020 financial statements, leading to operational limitations and uncertainties, but also prompted the development of new thermal imaging biosafety products[19][20][21] - The company has an accumulated deficit of $359.1 million and negative working capital of $4.8 million as of June 30, 2020, raising substantial doubt about its ability to continue as a going concern[22][27] - Remark plans to address going concern issues through revenue growth in its Technology and Data Intelligence segment, sales of thermal-imaging products, asset monetization, and debt/equity financings[28][30] NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details the basis of financial statement preparation, consolidation policies for VIEs, equity investment accounting, and the impact of COVID-19 on estimates - The financial statements are prepared in accordance with GAAP for interim reporting, with certain annual disclosures omitted[32] - Consolidation includes all subsidiaries and Variable-Interest Entities (VIEs) where Remark is the primary beneficiary, particularly for its KanKan business in China due to foreign ownership restrictions[36][37] - Equity investments are accounted for using the fair value method (e.g., Sharecare) or the equity method (e.g., AIO), depending on the level of influence[38] - Estimates and assumptions in financial reporting required increased judgment and carry higher variability due to the ongoing COVID-19 pandemic[39][40] NOTE 3. REVENUE This note details revenue recognition policies, including new biosafety product sales, and disaggregates revenue by category - Remark launched a new biosafety product line in Q2 2020, selling thermal imaging products (AI Thermal Kits, rPads, Thermal Helmets) primarily in the U.S. to scan for elevated temperatures[42][43][44][45] - Revenue for products is recognized at the point of customer control, while revenue for extended warranties and maintenance/support plans is recognized over the service period[46][47] Disaggregation of Revenue (in thousands) | Category | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | AI-based products and services | $2,053 | $2,466 | $2,377 | $2,890 | | Advertising and other | $246 | $399 | $353 | $1,184 | | Total Revenue | $2,299 | $2,865 | $2,730 | $4,074 | - AI-based products and services constituted 89% of total revenue for the three months ended June 30, 2020, up from 86% in the prior year, despite a decrease in absolute value[49][129] NOTE 4. FAIR VALUE MEASUREMENTS This note details the fair value measurement of liability-classified warrants using the Monte Carlo Simulation and contingent consideration - The company uses the Monte Carlo Simulation model to estimate the fair value of liability-classified warrants (CBG Financing Warrants and CBG Acquisition Warrants), categorized as Level 3 inputs[53][54] Warrant Liability Fair Value Inputs | Input | 2020 (CBG Financing Warrants) | 2019 (CBG Financing Warrants) | 2020 (CBG Acquisition Warrants) | 2019 (CBG Acquisition Warrants) | | :---------------------------- | :---------------------------- | :---------------------------- | :------------------------------ | :------------------------------ | | Expected volatility | 85.00% | 85.00% | 75.00% | 75.00% | | Risk-free interest rate | 0.18% | 1.60% | 0.23% | 1.65% | | Expected remaining term (years) | 0.23 | 0.73 | 3.23 | 3.72 | Change in Warrant Liability (in thousands) | Item | Six Months Ended June 30, 2020 | Year Ended December 31, 2019 | | :---------------------------------- | :----------------------------- | :--------------------------- | | 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 | - The liability for contingent consideration related to the Vegas.com acquisition was $1,120 thousand as of June 30, 2020, including accrued interest[59] NOTE 5. TRADE ACCOUNTS RECEIVABLE This note details trade accounts receivable, including gross balance, allowance for bad debt, and significant portion from China-based AI projects Trade Accounts Receivable (in thousands) | Item | June 30, 2020 | December 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 | - 55% of gross trade receivables are from China-based AI projects, which often have longer payment cycles[60] - The net accounts receivable increased from $1,964 thousand at December 31, 2019, to $2,235 thousand at June 30, 2020[60] NOTE 6. INVESTMENT IN UNCONSOLIDATED AFFILIATES This note details investments in unconsolidated affiliates, including Sharecare (fair value method) and AIO (equity method) - Remark owns approximately 4.5% of Sharecare, Inc., accounted for using the fair value method, and maintains Board representation[61] - A consolidated VIE acquired a 20% interest in AIO, a Chinese technology company, for $1.0 million and a KanKan platform license, accounted for using the equity method[62] - Equity in AIO's net earnings for the quarter ended March 31, 2020, was not material[62] NOTE 7. PREPAID EXPENSE AND OTHER CURRENT ASSETS This note details the composition and changes in prepaid expenses and other current assets, including the addition of inventory Prepaid Expense and Other Current Assets (in thousands) | Component | June 30, 2020 | December 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 | - The total prepaid expense and other current assets increased by $1,180 thousand, or 25.5%, from December 31, 2019, to June 30, 2020[63] - A new line item, 'Inventory, net,' appeared with a balance of $1,355 thousand as of June 30, 2020, contributing significantly to the increase in current assets[63] NOTE 8. PROPERTY AND EQUIPMENT This note details the decrease in net property and equipment due to accumulated depreciation and reduced amortization expense Property and Equipment (in thousands) | Component | June 30, 2020 | December 31, 2019 | | :-------------------------------------- | :------------ | :---------------- | | Total property, equipment and software | $5,917 | $6,022 | | Less accumulated depreciation | $(5,761) | $(5,681) | | Total property, equipment and software, net | $156 | $341 | - Net property and equipment decreased by 54.3% from $341 thousand to $156 thousand[64] - Depreciation and amortization expense for the six months ended June 30, 2020, was $0.1 million, a significant reduction from $0.4 million in the prior year, partly due to assets reaching full depreciation[64] NOTE 9. LEASES This note details operating lease expenses, weighted-average terms, discount rates, and liabilities, including early termination damages Lease Expense (in thousands) | Lease Expense Category | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease expense | $83 | $385 | $471 | $703 | | Short-term lease expense | $47 | $98 | $122 | $164 | | Less: Sublease income | — | $(78) | — | $(78) | | Total Lease expense | $130 | $405 | $593 | $789 | - Lease expense decreased by 24.8% for the six months ended June 30, 2020, compared to the prior year[65] - As of June 30, 2020, the weighted-average remaining lease term was approximately 14 months, with a weighted-average discount rate of approximately 13%[66] - The current portion of operating lease liability includes approximately $1.5 million for estimated damages from the early termination of the former Las Vegas office lease[67] NOTE 10. INTANGIBLE ASSETS This note details the decrease in total intangible assets, primarily finite-lived assets, and reduced amortization expense Intangible Assets (in thousands) | Category | June 30, 2020 Net Amount | December 31, 2019 Net Amount | | :--------------------------- | :----------------------- | :--------------------------- | | Finite-lived intangible assets | $345 | $382 | | Indefinite-lived intangible assets | $127 | $127 | | Total intangible assets | $472 | $509 | - Total intangible assets decreased by 7.3% from $509 thousand to $472 thousand[69] - Amortization expense for the six months ended June 30, 2020, was de minimis, a decrease from $0.2 million in the prior year[70] NOTE 11. INCOME TAX This note explains the 0.0% effective tax rate due to a full valuation allowance and the immaterial impact of the CARES Act - The effective tax rate (ETR) from continuing operations was 0.0% for the six months ended June 30, 2020, due to a full valuation allowance against deferred tax assets[71] - The CARES Act is not expected to have a material effect on current income tax expense or the realizability of deferred income tax assets as of June 30, 2020[72] NOTE 12. DEBT This note details changes in debt, including the repayment of the MGG Loan, outstanding short-term notes, and a new PPP Loan Debt (in thousands) | Debt Type | June 30, 2020 | December 31, 2019 | | :---------------------- | :------------ | :---------------- | | MGG loan due May 2020 | — | $12,025 | | Loans payable, current | — | $12,025 | | PPP loan due April 2022 | $425 | — | | Loans payable, long-term | $425 | — | - The $12.7 million MGG Loan was fully repaid and terminated on May 28, 2020[76][148] - A short-term note payable from 2017 had an outstanding principal and accrued interest of $2.4 million as of June 30, 2020[73][149] - Remark obtained a $0.4 million PPP Loan in April 2020, eligible for forgiveness under the CARES Act, with an outstanding balance of $0.4 million[77] NOTE 13. COMMITMENTS AND CONTINGENCIES This note outlines commitments and contingencies, including an Earnout Payment, landlord litigation, and discontinued MGG legal action - An Earnout Payment of approximately $1.1 million related to the Vegas.com acquisition was accrued as of June 30, 2020[80] - The company faced a lawsuit from its former landlord for unpaid rent and early lease termination, with an estimated liability of $1.5 million as of June 30, 2020[81] - MGG, a lender, had exercised its right to replace a subsidiary's board of directors and accelerated the MGG Loan due to defaults, but the loan was fully repaid and legal action discontinued by May 28, 2020[84][85][87] NOTE 14. STOCKHOLDERS' EQUITY, SHARE-BASED COMPENSATION AND NET LOSS PER SHARE This note details common shares outstanding, stock options, warrants, share issuances, share-based compensation, and net loss per share - As of August 11, 2020, 99,408,916 common shares were outstanding, with outstanding stock options (15.9 million shares) and warrants (6.6 million shares) exceeding the current authorized limit, necessitating a stockholder vote to increase authorized shares[88][89] - During the six months ended June 30, 2020, 48,238,893 common shares were issued to Aspire Capital under purchase agreements, generating approximately $32.0 million[91] - A registration statement was filed for an offering of 150,000 units, each consisting of four shares of Series A Preferred Stock and one warrant, with estimated net proceeds of $13.8 million[92] - Share-based compensation expense for the six months ended June 30, 2020, was $0.7 million, compared to $0.2 million in the prior year[97] - Net loss per share from continuing operations was $(0.17) for the six months ended June 30, 2020, compared to $(0.23) in the prior year[11] NOTE 15. RELATED PARTY TRANSACTIONS This note details related party receivables from senior management, which were settled by capital injection into VIEs - As of June 30, 2020, approximately $0.5 million in receivables from related parties (senior management cash advances) were outstanding[100] - These receivables were subsequently injected as additional capital into the company's VIEs in China and fully settled in July 2020[100][108] NOTE 16. SEGMENT INFORMATION This note details Remark Holdings' single reportable segment, Technology & Data Intelligence, and its financial performance using Adjusted EBITDA - Remark Holdings operates a single reportable segment: Technology & Data Intelligence, after disposing of its Travel and Entertainment segment[101] - Adjusted EBITDA is the primary measure of profitability for evaluating segment operational performance[102] Segment Financial Information (in thousands) | Metric | Three Months Ended June 30, 2020 (Technology & Data Intelligence) | Three Months Ended June 30, 2019 (Technology & Data Intelligence) | Six Months Ended June 30, 2020 (Technology & Data Intelligence) | Six Months Ended June 30, 2019 (Technology & Data Intelligence) | | :------------------------------------ | :---------------------------------------------------------------- | :---------------------------------------------------------------- | :-------------------------------------------------------------- | :-------------------------------------------------------------- | | Revenue | $987 | $2,465 | $1,311 | $2,890 | | Adjusted EBITDA | $(782) | $(344) | $(1,472) | $(3,003) | - Technology & Data Intelligence segment revenue decreased by 60% for the three months and 55% for the six months ended June 30, 2020, compared to the prior year[133][134] Total Assets by Segment (in thousands) | Segment | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Technology & Data Intelligence segment | $8,468 | $7,450 | | Corporate entity and other business units | $14,608 | $7,377 | | Consolidated | $23,076 | $14,827 | NOTE 17. DISCONTINUED OPERATIONS This note details the sale of the Travel and Entertainment segment (Vegas.com) and its financial results as discontinued operations - The Travel and Entertainment segment (Vegas.com) was sold on May 15, 2019, for $30.0 million[106] Discontinued Operations (Travel and Entertainment Segment) (in thousands) | Metric | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :-------------------------------------------- | :------------------------------- | :----------------------------- | | Revenue | $9,178 | $27,432 | | Cost of revenue | $1,240 | $4,016 | | Selling, general and administrative | $7,506 | $18,383 | | Technology and development | $1,082 | $3,280 | | Depreciation, amortization and impairments | $5,860 | $8,007 | | Loss from discontinued operations before income taxes | $(1,701) | $(2,824) | | Loss from discontinued operations | $(1,487) | $(2,610) | NOTE 18. SUBSEQUENT EVENTS This note outlines subsequent events, including settlement of related party receivables, stock option grants, and landlord litigation settlement - Related party receivables of approximately $0.5 million were settled in July 2020 through capital injection into VIEs[108] - Options to purchase approximately 5.6 million common shares were granted to employees and directors on July 27, 2020, contingent on stockholder approval for an increase in authorized shares[109] - The Hughes Center Lease Settlement was finalized on August 3, 2020, for $0.6 million, with an initial payment of $0.45 million and remaining installments, potentially increasing to $0.8 million if payments are not made on time[110] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Remark Holdings' financial condition and operational results, highlighting AI solutions, new biosafety business, COVID-19 impacts, and going concern plans OVERVIEW This overview describes Remark Holdings' core AI and data-analytics business, new biosafety products, and the impact of external factors - Remark Holdings is a diversified global technology company focused on AI and data-analytics solutions, with its Remark AI business (KanKan) delivering AI-based vision products and software-as-a-service[112][113] - The company markets AI solutions in retail, urban life cycle (smart communities, schools, traffic management), and workplace/food safety markets[114][115][116][117][118][119] - A new bio-safety business was launched in Q2 2020, repurposing urban life cycle solutions into thermal imaging products (Kits, rPads, Helmets) for crowd and individual temperature screening, primarily in the U.S.[120][121][122][123][126] - The COVID-19 pandemic, U.S.-China trade war, and working capital constraints significantly impacted business operations and results, leading to delayed contracts and limited operational capabilities[127] Revenue Categories as Percentage of Total Consolidated Revenue | Category | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | AI-based products and services | 89% | 86% | 87% | 71% | | Advertising and other | 11% | 14% | 13% | 29% | CRITICAL ACCOUNTING POLICIES This section confirms no material changes to critical accounting policies during the reported periods - No material changes were made to critical accounting policies during the three and six months ended June 30, 2020, as disclosed in the 2019 Form 10-K[131] RESULTS OF OPERATIONS This section analyzes Remark Holdings' operational performance, including revenue, expenses, and key financial metrics Technology & Data Intelligence Segment Performance (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change (Dollars) | Change (Percentage) | | :------------------------------------ | :------------------------------- | :------------------------------- | :--------------- | :------------------ | | Revenue | $987 | $2,465 | $(1,478) | (60)% |\n| Cost of revenue | $540 | $1,311 | $(771) | (59)% |\n| Sales and marketing | $124 | $119 | $5 | 4% |\n| Technology and development | $1,420 | $776 | $644 | 83% |\n| General and administrative | $253 | $402 | $(149) | (37)% |\n| Depreciation and amortization | $34 | $135 | $(101) | (75)% | | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change (Dollars) | Change (Percentage) | | :------------------------------------ | :----------------------------- | :----------------------------- | :--------------- | :------------------ | | Revenue | $1,311 | $2,890 | $(1,579) | (55)% |\n| Cost of revenue | $555 | $2,604 | $(2,049) | (79)% |\n| Sales and marketing | $219 | $445 | $(226) | (51)% |\n| Technology and development | $1,999 | $2,002 | $(3) | 0% |\n| General and administrative | $529 | $854 | $(325) | (38)% |\n| Depreciation and amortization | $87 | $305 | $(218) | (71)% |\n| Other operating expense | — | $6 | $(6) | (100)% | - Technology & Data Intelligence segment revenue decreased significantly due to fewer project completions, impacted by COVID-19, the U.S.-China trade war, and working capital constraints[134] - Technology and development expense increased by 83% for the three months ended June 30, 2020, primarily due to increased share-based compensation expense linked to stock price increases[136] - Consolidated revenue decreased by 20% for the three months and 33% for the six months ended June 30, 2020, with new bio-safety business revenue partially offsetting declines in e-commerce and Remark Entertainment[138][139][140][141] - Interest expense increased by 40% for the three months and 31% for the six months ended June 30, 2020, despite debt prepayments, due to specific loan terms[138][139][144] - A significant loss of $(6,260) thousand for the three months and $(6,203) thousand for the six months ended June 30, 2020, was recognized from the change in fair value of warrant liability, driven by increases in the common stock price[138][139][145] LIQUIDITY AND CAPITAL RESOURCES This section discusses Remark Holdings' liquidity, capital resources, going concern status, and plans for future funding - Remark Holdings has an accumulated deficit of $359.1 million and negative working capital of $4.8 million as of June 30, 2020, raising substantial doubt about its ability to continue as a going concern[146][152] - Net cash used in continuing operating activities was $9.2 million for the six months ended June 30, 2020, an increase of $1.8 million compared to the prior year[146][157] - The company repaid approximately $12.7 million of the MGG Loan on May 28, 2020, and received $32.0 million from common stock sales to Aspire Capital during the six months ended June 30, 2020[148][151][159] - Future operations are planned to be funded through revenue growth in the Technology and Data Intelligence segment, thermal-imaging product sales, asset monetization, and additional debt/equity financings, but success is uncertain[153][155][156] Off-Balance Sheet Arrangements This section confirms that Remark Holdings currently has no off-balance sheet arrangements - Remark Holdings currently has no off-balance sheet arrangements[160] Recently Issued Accounting Pronouncements This section refers to Note 2 for details on recently issued accounting pronouncements and their immaterial effect - Refer to Note 2 for a discussion of recently issued accounting pronouncements, which are not expected to have a material effect[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section confirms no applicable quantitative and qualitative disclosures about market risk for the current report - This item is not applicable for the current report[162] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective due to material weaknesses in internal control over financial reporting, with remediation efforts underway - Disclosure controls and procedures were deemed not effective as of June 30, 2020, due to material weaknesses in internal control over financial reporting[164] - Material weaknesses include insufficient documentation for manual journal entries and revenue recognition, deficiencies in controls for the Technology and Data Intelligence segment (accounts payable, accrued liabilities, payroll, fixed assets), and issues with inventory purchase evidence and valuation of discounted sales[164] - Procedural changes are being implemented to remediate these weaknesses, but their effectiveness has not yet been fully evaluated[165] PART II OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings This section details Remark Holdings' involvement in various legal proceedings, including settlements for CBG, Greenspun, MGG, and landlord litigations - The CBG Litigation, seeking rescission of the China Branding Group acquisition, was settled with Mr. Roseman and a stipulation for settlement with CBG and JOLs, involving the issuance of warrants[166][167] - A judgment of $1,050,000 was entered against Remark in the Greenspun Litigation for failing to make the final earnout payment for the Vegas.com acquisition, with settlement negotiations underway[168][169] - The MGG Litigation for breach of contract was voluntarily discontinued by MGG on June 23, 2020, following Remark's full repayment of outstanding obligations under the Financing Agreement[170] - The Landlord Litigation for unpaid office lease rent was settled on August 3, 2020, for $0.6 million, payable in installments, with a potential increase to $0.8 million if payments are not met[171] Item 1A. Risk Factors This section highlights the highly unpredictable and significant adverse impacts of the COVID-19 pandemic on business and financial results - The continuing impacts of COVID-19 are highly unpredictable and could significantly and adversely affect the business and financial results[172] - Potential impacts include lack of revenue growth, increased need for external financing, significant decline in debt and equity markets, and productivity/oversight challenges from remote work and governmental restrictions[172] - The duration and severity of the outbreak, travel restrictions, business closures, and impact on capital markets are highly uncertain and cannot be predicted[173][174] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms no applicable disclosures regarding unregistered sales of equity securities and use of proceeds - This item is not applicable for the current report[174] Item 3. Defaults Upon Senior Securities This section confirms no applicable disclosures regarding defaults upon senior securities - This item is not applicable for the current report[174] Item 4. Mine Safety Disclosures This section confirms no applicable disclosures regarding mine safety - This item is not applicable for the current report[174] Item 5. Other Information This section confirms no other information is reported under this item - No other information is reported under this item[175] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate certificates, CEO/CFO certifications, and XBRL documents Selected Exhibits Filed | Exhibit Number | Description | | :------------- | :---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | 3.1 | Certificate of Elimination filed with the Secretary of State of Delaware on July 20, 2020. | | 3.2 | Certificate of Amendment to Amended and Restated Certificate of Incorporation. | | 3.3 | Certificate of Correction of the Certificate of Amendment to the Amended and Restated Certificate of Incorporation. | | 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | | 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | | 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002. | | 101.INS | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL 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 | Signature The report is signed by Kai-Shing Tao, Chairman and CEO of Remark Holdings, Inc., dated August 14, 2020 - The report was signed by Kai-Shing Tao, Chairman and Chief Executive Officer (principal executive, financial, and accounting officer) on August 14, 2020[176]