Remark Holdings(MARK) - 2024 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION This section provides the company's unaudited financial statements and related notes, detailing its financial position, performance, and cash flows ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, detailing financial position, performance, and cash flows with explanatory notes Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and stockholders' deficit at specific points in time, reflecting its financial health | Metric | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------ | | Cash | $21 | $145 | | Total current assets | $1,614 | $9,440 | | Total assets | $2,612 | $10,236 | | Total current liabilities | $58,106 | $49,540 | | Total liabilities | $58,227 | $49,826 | | Total stockholders' deficit | $(55,615) | $(39,590) | - Total assets decreased significantly from $10,236 thousand at December 31, 2023, to $2,612 thousand at September 30, 2024, while total liabilities increased from $49,826 thousand to $58,227 thousand[15] Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss This statement details the company's revenues, expenses, and net loss over specific periods, indicating operational performance | Metric (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $320 | $183 | $4,406 | $4,176 | | Total cost and expense | $10,365 | $4,312 | $21,521 | $15,307 | | Operating loss | $(10,045) | $(4,129) | $(17,115) | $(11,131) | | Net loss | $(9,614) | $(7,172) | $(28,664) | $(21,208) | | Comprehensive loss | $(9,666) | $(6,997) | $(28,747) | $(21,578) | | Net loss per share, basic and diluted | $(0.19) | $(0.39) | $(0.66) | $(1.38) | - Net loss increased by 34% for the three months ended September 30, 2024, to $(9,614) thousand, and by 35% for the nine months ended September 30, 2024, to $(28,664) thousand, primarily due to a significant increase in impairments[17] Unaudited Condensed Consolidated Statements of Stockholders' Deficit This statement tracks changes in the company's equity, including common stock, additional paid-in capital, and accumulated deficit | Metric (in thousands) | September 30, 2024 | December 31, 2023 | | :-------------------------------- | :----------------- | :------------------ | | Common Stock Shares | 53,770,968 | 22,038,855 | | Common Stock Par Value | $54 | $22 | | Additional Paid In Capital | $391,934 | $379,244 | | Accumulated Deficit | $(446,334) | $(417,670) | | Total Stockholders' Deficit | $(55,615) | $(39,590) | - The accumulated deficit increased to $(446,334) thousand as of September 30, 2024, from $(417,670) thousand at December 31, 2023, reflecting ongoing net losses[20] - Common stock shares outstanding significantly increased from 22,038,855 at December 31, 2023, to 53,770,968 at September 30, 2024, largely due to issuances related to agreements with Ionic[20] Unaudited Condensed Consolidated Statements of Cash Flows This statement categorizes cash inflows and outflows from operating, investing, and financing activities, showing liquidity changes | Cash Flow Activity (in thousands) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(7,034) | $(9,083) | | Net cash used in investing activities | $(569) | $(32) | | Net cash provided by financing activities | $7,479 | $9,333 | | Net change in cash | $(124) | $218 | | Cash at End of Period | $21 | $270 | - Net cash used in operating activities decreased by $2,000 thousand, from $(9,083) thousand in 2023 to $(7,034) thousand in 2024, primarily due to timing of working capital payments[23][177] - Cash provided by financing activities decreased by $1,900 thousand, from $9,333 thousand in 2023 to $7,479 thousand in 2024[23][180] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and additional information supporting the condensed consolidated financial statements NOTE 1. ORGANIZATION AND BUSINESS This note describes the company's business, its going concern risks, and management's plans to address liquidity challenges - Remark Holdings, Inc. is a diversified global technology business focused on AI and data-analytics solutions, with common stock traded on the OTCQX market under the ticker symbol MARK[25] - The company has a history of recurring operating losses, working capital deficiencies, and negative cash flows, resulting in a stockholders' deficit of $55.6 million as of September 30, 2024, raising substantial doubt about its ability to continue as a going concern[27][28] - Management plans to fund future operations through revenue growth from AI and data analytics offerings and is actively evaluating strategic alternatives, including debt and equity financings[29] NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting principles and methods used in preparing the financial statements, including revenue recognition - Financial statements are prepared in accordance with Form 10-Q instructions, omitting certain information and footnote disclosures normally included in annual GAAP statements[33] - Revenue is recognized when control of promised goods or services is transferred to customers and collectability of consideration is probable, primarily from AI-based products and services[45][46] Cash Balances by Currency Denomination (in thousands) | Cash denominated in: | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :------------------- | :----------------- | :------------------ | | USD | $2 | $3 | | CNY | $14 | $10 | | GBP | $1 | $0 | | HKD | $4 | $0 | | Total cash | $21 | $14 | NOTE 3. CONCENTRATION OF RISK This note identifies significant concentrations of risk, particularly regarding revenue from a single customer and deferred cost of revenue - The majority of revenue for the nine months ended September 30, 2024, resulted from one customer, indicating a significant concentration of revenue risk[61] - A risk concentration exists regarding deferred cost of revenue, particularly related to projects in China[62] - The company believes there are sufficient alternative vendors for hardware purchases, mitigating supply chain disruption risk for cost of sales[63] NOTE 4. REVENUE This note disaggregates revenue by product/service category and geographic region, highlighting shifts in revenue sources Disaggregation of Revenue by Category (in thousands) | Category | 3 Months Ended Sep 30, 2024 (in thousands) | 3 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2024 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | | :----------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | AI-based products and services | $234 | $174 | $4,320 | $4,000 | | Other | $86 | $9 | $86 | $176 | | Total Revenue | $320 | $183 | $4,406 | $4,176 | Disaggregation of Revenue by Country (in thousands) | Country | 3 Months Ended Sep 30, 2024 (in thousands) | 3 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2024 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | | :----------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | China | $253 | $174 | $640 | $4,014 | | United States and United Kingdom | $67 | $9 | $3,766 | $162 | | Total Revenue | $320 | $183 | $4,406 | $4,176 | - Revenue from China significantly decreased from $4,014 thousand in the nine months ended September 30, 2023, to $640 thousand in the same period of 2024, while U.S. and U.K. revenue increased from $162 thousand to $3,766 thousand[66] NOTE 5. TRADE ACCOUNTS RECEIVABLE This note details the composition of trade accounts receivable, including allowances for bad debt and regional breakdowns Trade Accounts Receivable, Net (in thousands) | Region | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------- | :----------------- | :------------------ | | U.S. and U.K. (net) | $6 | $20 | | China (net) | $296 | $1,267 | | Total Accounts Receivable - net | $302 | $1,287 | - Gross accounts receivable in China were $6,756 thousand at September 30, 2024, with an allowance for bad debt of $6,460 thousand, reflecting longer payment timelines and lingering COVID-19 effects[72] NOTE 6. DEFERRED COST OF REVENUE This note explains the deferred cost of revenue and the significant impairment recorded due to project delays and geopolitical factors - Deferred cost of revenue, primarily related to China projects, was $6.6 million at December 31, 2023, with $0.4 million utilized in 2024[73] - A full impairment of $6.5 million was recorded during the three months ended September 30, 2024, due to delays from COVID-19 lockdowns, slow recovery, increased U.S.-China political tensions, and limited capital resources for China operations[74] NOTE 7. PREPAID EXPENSE AND OTHER CURRENT ASSETS This note itemizes the components of prepaid expenses and other current assets, such as other receivables and deposits Components of Prepaid Expense and Other Current Assets (in thousands) | Component | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------- | :----------------- | :------------------ | | Other receivables | $3 | $147 | | Prepaid expense | $352 | $339 | | Deposits | $122 | $128 | | Total | $477 | $614 | NOTE 8. PROPERTY AND EQUIPMENT This note presents the net book value of property and equipment, including accumulated depreciation Property and Equipment, Net (in thousands) | Category | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :----------------- | :------------------ | | Total property, equipment and software | $6,315 | $5,698 | | Less accumulated depreciation | $(5,700) | $(5,509) | | Total property, equipment and software, net | $615 | $189 | - Net property, equipment, and software increased from $189 thousand at December 31, 2023, to $615 thousand at September 30, 2024[76] NOTE 9. ACCRUED EXPENSE AND OTHER CURRENT LIABILITIES This note details the various components of accrued expenses and other current liabilities, such as payroll taxes and other payables Components of Accrued Expense and Other Current Liabilities (in thousands) | Component | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :----------------- | :------------------ | | Accrued compensation and benefit-related expense | $3,084 | $3,221 | | Accrued delinquent payroll taxes | $1,391 | $495 | | Accrued interest | $0 | $1,570 | | Other accrued expense | $3,272 | $3,187 | | Other payables | $2,326 | $2,138 | | Operating lease liability - current | $261 | $288 | | Other current liabilities | $994 | $788 | | Total | $11,328 | $11,687 | - Accrued delinquent payroll taxes increased from $495 thousand at December 31, 2023, to $1,391 thousand at September 30, 2024[77] NOTE 10. NOTES PAYABLE This note describes the company's notes payable, including the exchange of Mudrick Notes for Secured Convertible Debentures Notes Payable (in thousands) | Type | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------- | :----------------- | :------------------ | | 2023 Mudrick Notes | $0 | $16,307 | | Secured Convertible Debentures | $19,489 | $0 | | Notes payable | $19,489 | $16,307 | - On August 5, 2024, the 2023 Mudrick Notes (principal $16.3 million plus $3.7 million accrued interest) were exchanged for newly-issued Secured Convertible Debentures totaling approximately $19.981 million[80][87] - The Secured Convertible Debentures mature on May 15, 2025, bear interest at 20.5% per annum (payable in common stock), are convertible into common stock at the Investors' option (subject to a $0.10 floor price), and are secured by all company assets[81][86] NOTE 11. FUNDS RECEIVED IN ADVANCE OF POTENTIAL FINANCING This note discloses the liability for cash received in anticipation of a future financing agreement - As of September 30, 2024, the company reported a liability of $2.75 million for cash received from an unrelated potential investor/creditor in advance of finalizing an agreement[88] NOTE 12. OBLIGATIONS TO ISSUE COMMON STOCK (TRANSACTIONS WITH IONIC) This note details the company's obligations to issue common stock, primarily related to agreements with Ionic Changes in Obligations to Issue Common Stock (in thousands) | Obligation | Balance at Dec 31, 2023 (in thousands) | Establishment of new obligation (in thousands) | Issuance of shares (in thousands) | Change in measurement of liability (in thousands) | Balance at Sep 30, 2024 (in thousands) | | :----------------------- | :-------------------------- | :------------------------------ | :----------------- | :------------------------------- | :-------------------------- | | 2023 Debentures | $4,647 | $0 | $(10,321) | $5,674 | $0 | | ELOC Advances | $5,386 | $7,781 | $(2,318) | $995 | $11,844 | | Total | $10,033 | $7,781 | $(12,639) | $6,669 | $11,844 | - During the nine months ended September 30, 2024, the company issued 16,271,989 shares (fair value $10.3 million) in final settlement of 2023 Debentures and 14,841,931 shares (fair value $2.3 million) in partial settlement of ELOC Advances[91][102] - As of September 30, 2024, an estimated 110,482,841 shares (fair value $11.8 million) are expected to be issued in settlement of ELOC Advances[102][104] NOTE 13. COMMITMENTS AND CONTINGENCIES This note states the company's current commitments and contingencies, including legal proceedings - As of September 30, 2024, the company had no material commitments outside the normal course of business[106] - The company was neither a defendant in any material pending legal proceeding nor aware of any material threatened claims against it[107] NOTE 14. STOCKHOLDERS' DEFICIT This note provides details on changes in stockholders' deficit, including common stock issuances and outstanding equity instruments - During the nine months ended September 30, 2024, the company issued 31,113,920 shares (fair value $12.6 million) to Ionic and 488,193 shares (fair value $0.1 million) to Mudrick[108] Equity-Classified Stock Warrants Outstanding | Metric | September 30, 2024 | December 31, 2023 | | :-------------------------------- | :----------------- | :------------------ | | Shares Outstanding | 1,007,441 | 1,007,441 | | Weighted Average Exercise Price Per Share | $39.90 | $39.90 | | Weighted-Average Remaining Contractual Term | 1.7 years | 2.7 years | Equity-Classified Stock Options Outstanding | Metric | September 30, 2024 | December 31, 2023 | | :-------------------------------- | :----------------- | :------------------ | | Shares Outstanding | 1,516,911 | 1,618,851 | | Weighted Average Exercise Price Per Share | $28.54 | $30.31 | | Weighted-Average Remaining Contractual Term | 3.7 years | 4.5 years | NOTE 15. RELATED PARTY TRANSACTIONS This note discloses transactions and balances with related parties, including amounts owed to management - As of September 30, 2024, the company owed approximately $1.5 million to members of management for operating expense payments; these amounts are unsecured, non-interest-bearing, with no formal repayment terms[115] - In August 2024, the company entered into a $0.3 million short-term, non-interest bearing, unsecured promissory note with a related party[116] NOTE 16. CHINA BUSINESS PARTNER This note describes the company's relationship with a China Business Partner, including revenue and outstanding payables - The company has a multi-faceted relationship with an unrelated China Business Partner, including past revenue generation, inventory and software purchases, and a shared senior leadership team member[117] - No or de minimis revenue was recognized from the China Business Partner relationship during the nine months ended September 30, 2024 and 2023[118] - Outstanding accounts payable to the China Business Partner were $0.7 million at both September 30, 2024, and December 31, 2023[118] NOTE 17. SUBSEQUENT EVENTS This note reports significant events occurring after the reporting period, such as further stock issuances and preferred stock designations - From October 1, 2024, through January 8, 2025, the company issued 5,950,503 common shares to Ionic for ELOC Advances and 2,060,584 common shares to Mudrick for $0.2 million of Secured Convertible Debentures[119] - On October 31, 2024, the company designated 150,000 shares of Series A Redeemable Voting Preferred Stock, which were issued to the Chief Executive Officer, Kai-Shing Tao[120][121] - The Series A Preferred Stock has no dividends, a $0.001 liquidation preference (junior to Series B), is automatically redeemable in 270 days, is not convertible, and carries 1,000 votes per share on specific voting proposals[122] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition, operational results, and future outlook, including strategic shifts and liquidity challenges OUR BUSINESS This section describes Remark's core AI and data-analytics business, its strategic shift away from China, and expansion efforts in other regions - Remark's core business involves AI and data-analytics, utilizing its Smart Safety Platform (SSP) for computer vision products and solutions in various markets including retail, construction, and public safety[124][125][127] - The company is strategically shifting its business focus away from China due to slow economic recovery and rising political tensions, reducing staff and aiming for China business to be a minimal portion of overall operations[128][129] - Expansion efforts are concentrated in the Asia-Pacific region (outside China), U.S., U.K., and Central/South America, with plans to develop channel partnerships[129][130] Revenue Categories as a Percentage of Total Consolidated Revenue | Category | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | | :----------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | AI-based products and services | 73 % | 95 % | 98 % | 96 % | | Advertising and other | 27 % | 5 % | 2 % | 4 % | CRITICAL ACCOUNTING ESTIMATES This section discusses key accounting estimates, particularly the impairment of deferred cost of revenue related to China projects - The company recorded a full impairment of $6.5 million during the three months ended September 30, 2024, for the Deferred cost of revenue asset associated with pending projects in China[139] - The impairment was necessitated by the slow economic recovery in China, increased political tensions between the U.S. and China, and limited capital resources for China operations, which caused significant delays in project completion[139] RESULTS OF OPERATIONS This section analyzes the company's revenue and expense changes for the reported periods, explaining the drivers of net loss Operating Results (in thousands) | Metric | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | Change (Dollars) | Change (Percentage) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :----------------- | :------------------ | | Revenue | $320 | $183 | $137 | 75 % | | Cost of revenue | $107 | $254 | $(147) | (58)% | | Sales and marketing | $281 | $340 | $(59) | (17)% | | Technology and development | $698 | $768 | $(70) | (9)% | | General and administrative | $2,763 | $2,843 | $(80) | (3)% | | Depreciation and amortization | $53 | $107 | $(54) | (50)% | | Impairments | $6,463 | $0 | $6,463 | N/A | | Interest expense | $(376) | $(949) | $573 | (60)% | | Finance cost related to obligations to issue common stock | $809 | $(2,086) | $2,895 | (139)% | | Net loss | $(9,614) | $(7,172) | $(2,442) | 34 % | Operating Results (in thousands) | Metric | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | Change (Dollars) | Change (Percentage) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :----------------- | :------------------ | | Revenue | $4,406 | $4,176 | $230 | 6 % | | Cost of revenue | $3,382 | $3,220 | $162 | 5 % | | Sales and marketing | $850 | $1,093 | $(243) | (22)% | | Technology and development | $1,410 | $1,504 | $(94) | (6)% | | General and administrative | $9,080 | $8,920 | $160 | 2 % | | Depreciation and amortization | $175 | $178 | $(3) | (2)% | | Impairments | $6,624 | $392 | $6,232 | 1,590 % | | Interest expense | $(2,280) | $(3,351) | $1,071 | (32)% | | Finance cost related to obligations to issue common stock | $(9,263) | $(6,712) | $(2,551) | 38 % | | Net loss | $(28,664) | $(21,208) | $(7,456) | 35 % | - Revenue for the nine months ended September 30, 2024, increased by 6% to $4,406 thousand, driven by a $3.7 million increase in U.S. revenue from a school district project, which largely offset a $3.4 million reduction in China revenue[142] LIQUIDITY AND CAPITAL RESOURCES This section assesses the company's cash position, operating cash flows, and ability to fund future operations, highlighting going concern risks - The company has a stockholders' deficit of $55.6 million and used $7.0 million in operating cash flows during the nine months ended September 30, 2024, with a cash balance of less than $0.1 million, leading to substantial doubt about its ability to continue as a going concern[152][153] - Future funding relies on revenue growth from AI and data analytics offerings and evaluating strategic alternatives, including debt and equity financings, but success is uncertain due to market conditions[154][155] - The 2023 Mudrick Notes were exchanged for Secured Convertible Debentures (approx. $19.981 million principal and accrued interest) on August 5, 2024, bearing 20.5% interest and convertible into common stock[162][163] - Net cash used in operating activities decreased by $2,000 thousand during the nine months ended September 30, 2024, compared to the prior year, primarily due to the timing of working capital payments[177] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section states that there are no applicable quantitative and qualitative disclosures about market risk for the reported period - This item is not applicable[183] ITEM 4. CONTROLS AND PROCEDURES This section reports on the ineffectiveness of disclosure controls and procedures due to material weaknesses and ongoing remediation efforts - Disclosure controls and procedures were not effective as of September 30, 2024, due to identified material weaknesses[187] - Material weaknesses include insufficient documentation of review and approval of manual journal entries, inadequate documentation of appropriate revenue recognition criteria for certain China contracts, and insufficient valuation of e-commerce inventory[185] - Remediation efforts are ongoing, but their effects were not fully mitigated as of September 30, 2024, partly due to the COVID-19 pandemic and working capital restrictions[188] PART II OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered equity sales, and other miscellaneous disclosures ITEM 1. LEGAL PROCEEDINGS This section confirms that the company is not currently involved in any material legal proceedings - The company is not a defendant in any material pending legal proceeding[191] ITEM 1A. RISK FACTORS This section highlights key risks associated with investing in the company, including operating losses, capital uncertainty, and customer concentration - Investing in the company's common stock involves a high degree of risk, with no material changes from the risk factors disclosed in the 2023 Form 10-K[192] - The company has a history of operating losses and an accumulated deficit of $(446.3) million as of September 30, 2024, with no assurance of generating sufficient revenue to sustain operations[193][194] - The ability to obtain additional capital through equity or debt financing is uncertain and dependent on market conditions, with potential for dilution to existing stockholders[195] - The majority of revenue for the nine months ended September 30, 2024, resulted from one customer, indicating a high concentration risk[196] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the issuance of common stock to specific entities under an exemption from registration requirements - Between July 1, 2024, and September 30, 2024, the company issued 3,280,715 shares of common stock to Ionic Ventures, LLC for advances under the Amended ELOC Purchase Agreement[198] - Additionally, 488,193 shares of common stock were issued to Mudrick Capital Management LP pursuant to partial conversions of secured convertible debentures[198] - These sales were conducted in reliance upon an exemption from registration requirements pursuant to Section 4(a)(2) of the Securities Act of 1933[199] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section states that there were no defaults upon senior securities during the reported period - None[200] ITEM 4. MINE SAFETY DISCLOSURES This section confirms that mine safety disclosures are not applicable to the company - Not applicable[201] ITEM 5. OTHER INFORMATION This section reports on the absence of Rule 10b5-1 trading arrangement adoptions or terminations by directors or officers - None of the company's directors or officers adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the nine months ended September 30, 2024[202] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including corporate governance documents and certifications - The exhibits include Amended and Restated Certificate of Incorporation, Certificates of Amendment, Certificate of Designations for Series A and B Preferred Stock, Amended and Restated Bylaws, Stock Purchase Agreement with Kai-Shing Tao, Voting Agreement with Kai-Shing Tao, and various certifications (e.g., 31.1, 31.2, 32)[204] Signature This section confirms the official signing of the Quarterly Report on Form 10-Q by the registrant's authorized officer - The report was signed on January 13, 2025, by Kai-Shing Tao, Chairman and Chief Executive Officer (principal executive, financial, and accounting officer) of Remark Holdings, Inc[208]