Remark Holdings(MARK) - 2020 Q4 - Annual Report

PART I Business The company is a global technology firm specializing in artificial intelligence and data analytics, with a portfolio of digital media properties - The company's core business is its proprietary AI platform, Remark AI (known as KanKan in Asia-Pacific), which delivers AI-based software products, computing devices, and SaaS solutions across various industries[18] - Remark AI's solutions target three main markets: Retail Solutions (analyzing customer behavior), Urban Life Cycle Solutions (smart communities, schools, and traffic management), and Workplace and Food Safety Solutions (monitoring compliance)[19][20][21] - In response to the COVID-19 pandemic, the company launched a new biosafety business in the second quarter of 2020, offering thermal imaging products like Remark AI Thermal Kits and rPads, primarily targeting the U.S. market[15][22][23] - The company holds an approximate 4.4% equity stake in Sharecare, Inc, a health and wellness platform, which it co-founded in 2009[13][24] - To comply with Chinese laws restricting foreign ownership, the company operates its KanKan business in China through a structure of a wholly-foreign owned enterprise (WFOE) and Variable Interest Entities (VIEs)[35][36] Risk Factors The company faces significant risks in its business, financial condition, and stock, including operational challenges in China and a 'going concern' opinion Risks Relating to Our Business and Industry Key business risks include a share authorization shortfall, pandemic impacts, an unproven AI market, and the legal uncertainty of its China VIE structure - The company has insufficient authorized shares of common stock (100M authorized vs 99.9M outstanding) to cover the potential exercise of all outstanding stock options (~15.3M shares) and warrants[43][44] - The COVID-19 pandemic could adversely affect business through decreased customer demand, reduced ability to obtain financing, and challenges related to remote work environments[46] - The company's VIE structure in China is subject to interpretation by Chinese regulators; if deemed non-compliant, Remark could lose control of its China operations, face penalties, or be forced to restructure[61][62][63] - The AI market is new and unproven, and its growth is subject to risks such as lack of customer acceptance, technological challenges, and competition, which could adversely affect demand for the company's products[48][49] - The company faces intense competition from larger, more established companies with greater brand recognition and financial resources, which may adopt more aggressive pricing and marketing strategies[84][85] Risks Relating to our Company Major company risks stem from a history of operating losses, a large accumulated deficit, and a 'going concern' opinion from its auditors - The company has a history of net losses and negative cash flow from operations, resulting in an accumulated deficit of $360.5 million as of December 31, 2020[89] - The independent registered public accounting firm's report for fiscal years 2020 and 2019 raised substantial doubt about the company's ability to continue as a "going concern"[91] - International operations, particularly in China, expose the company to risks including political instability, compliance with foreign laws (like the Foreign Corrupt Practices Act), and restrictions on repatriation of cash[94][95] - The company's investment in Sharecare's equity securities is illiquid, as there is no public market for them, and the ability to realize a return is dependent on Sharecare's success[100] Risks Relating to Our Common Stock Common stock risks include high price volatility, concentrated ownership, and potential for substantial shareholder dilution - The common stock trading price is highly volatile, with a range of $0.25 to $4.72 between January 1, 2019, and March 29, 2021[101] - Stock ownership is concentrated, with Chairman and CEO Kai-Shing Tao beneficially owning 9.8% of common stock as of March 29, 2021, potentially limiting other stockholders' influence[103] - Existing stockholders face substantial dilution from the potential issuance of common stock tied to approximately 15.3 million outstanding stock options and warrants for over 5.7 million shares[104][105] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[109] Properties The company's primary operations are conducted from leased office spaces in Las Vegas, Nevada, and Chengdu, China - The company leases its primary office space in Las Vegas, Nevada (lease expires March 2023) and Chengdu, China (lease expires September 2022)[109] Legal Proceedings The company settled litigation related to its CBG acquisition by agreeing to issue warrants for 5,710,000 shares of common stock - The company initiated legal proceedings related to its acquisition of China Branding Group Limited (CBG), alleging fraudulent misrepresentation[110] - A settlement was reached which requires Remark to issue fully-transferable warrants for the purchase of 5,710,000 shares of common stock at a $6.00 per-share exercise price, exercisable for 5 years[111] Mine Safety Disclosures This item is not applicable to the company - Not applicable[112] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'MARK', and it does not anticipate paying dividends - The company's common stock is listed on the NASDAQ Capital Market under the symbol MARK[113] - As of March 29, 2021, there were 80 holders of record of the common stock[114] - The company has never declared or paid dividends and intends to retain all available funds for operations and growth[115] Selected Financial Data This item is not applicable to the company - Not applicable[115] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue doubled in 2020, driven by AI contracts and a new biosafety business, though the company's financial condition remains precarious Results of Operations Revenue grew 102% to $10.1 million in 2020, significantly reducing the net loss to $13.7 million from $25.6 million in 2019 Consolidated Results of Operations (2020 vs 2019) | Metric | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $10,145 | $5,020 | $5,125 | 102% | | Cost of revenue | $6,422 | $3,514 | $2,908 | 83% | | General & administrative | $9,368 | $14,174 | $(4,806) | (34)% | | Operating loss | $(14,245) | $(22,754) | $8,509 | (37)% | | Gain on lease termination | $3,582 | $0 | $3,582 | N/A | | Change in fair value of warrant liability | $(1,610) | $1,268 | $(2,878) | (227)% | | Net loss | $(13,685) | $(25,614) | $11,929 | (47)% | - Revenue from AI-based products and services grew to 95% of total revenue in 2020, up from 72% in 2019[130] - The increase in revenue was driven by the ramp-up of larger contracts in China (e.g, China Mobile project), contributing an additional $4.3 million, and the new biosafety business, which added $1.7 million[143] - General and administrative expenses decreased by $4.8 million (34%), primarily due to a $2.9 million reduction in net lease costs and a $2.0 million decrease in bad debt expense[146][147] Liquidity and Capital Resources The company's liquidity is severely constrained, with negative working capital and a 'going concern' doubt despite raising $32.0 million in capital - As of December 31, 2020, the company had an accumulated deficit of $360.5 million, a cash balance of $0.9 million, and a negative working capital of $8.3 million[152] - The company's history of recurring losses and negative cash flows from operations ($18.0 million used in 2020) gives rise to substantial doubt about its ability to continue as a going concern[152][155] - In 2020, the company received $32.0 million from sales of common stock to Aspire Capital and repaid its outstanding obligations under its Financing Agreement with MGG for approximately $12.7 million[153][161] - The company's plans to fund future operations include growing revenue from new product lines, monetizing existing assets, and obtaining additional capital through equity or debt issuances, though success is not guaranteed[158] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company - Not applicable[162] Financial Statements and Supplementary Data This section refers to the consolidated financial statements and notes included in the report starting on page F-1 - The required financial statements and schedules are included in the Form 10-K beginning on page F-1[163] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[164] Controls and Procedures Management concluded that disclosure controls were not effective as of year-end 2020 due to persistent material weaknesses - Management concluded that due to material weaknesses in internal control over financial reporting, the company's disclosure controls and procedures were not effective as of December 31, 2020[166] - Material weaknesses identified in prior years persist, relating to: 1) insufficient documentation of review and approval of manual journal entries, 2) insufficient documentation of revenue recognition criteria for certain contracts, and 3) issues with the valuation of e-commerce inventory[169][170] - Remediation plans to address these weaknesses are ongoing but were slowed by various factors, including the COVID-19 pandemic, and were not fully effective in 2020[173] Other Information The company reports no other information for this item - None[174] PART III Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the company's 2021 proxy statement - Information is incorporated by reference from the 2021 Proxy Statement[175] Executive Compensation Required information is incorporated by reference from the company's 2021 proxy statement - Information is incorporated by reference from the 2021 Proxy Statement[176] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information is incorporated by reference from the 2021 Proxy Statement, with details on equity compensation plans provided Equity Compensation Plan Information as of December 31, 2020 | Plan category | Number of Common Stock Shares to be Issued upon Exercise of Outstanding Options | Weighted Average Exercise Price of Outstanding Options | Number of Securities Remaining Available for Future Issuance under Plans | | :--- | :--- | :--- | :--- | | Approved by security holders | 15,345,841 | $3.97 | 3,652,101 | Certain Relationships and Related Transactions and Director Independence Required information is incorporated by reference from the company's 2021 proxy statement - Information is incorporated by reference from the 2021 Proxy Statement[181] Principal Accountant Fees and Services Required information is incorporated by reference from the company's 2021 proxy statement - Information is incorporated by reference from the 2021 Proxy Statement[182] PART IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K, including financial statements and an exhibit index - This section includes the consolidated financial statements, notes, and the report of the Independent Registered Public Accounting Firm[184] - An Exhibit Index is provided, which describes the exhibits filed as part of or incorporated by reference into the Form 10-K[186] Financial Statements and Notes Report of Independent Registered Public Accounting Firm Auditors issued a 'Going Concern' warning for both 2019 and 2020 due to recurring losses and negative cash flows - The auditors' reports for both 2020 and 2019 contain a "Going Concern" paragraph, citing recurring losses, negative cash flows, and negative working capital as factors that raise substantial doubt about the company's ability to continue operations[199][212] - The 2020 audit identified two critical audit matters: the realization of $5.8 million in accounts receivable from customers in China and the accounting treatment of a $1.5 million advance to a marketing partner as a marketing cost[203][204][207] Consolidated Financial Statements The company reported a net loss of $13.7 million in 2020 and ended the year with a total stockholders' deficit of $9.1 million Key Balance Sheet Data (as of Dec 31) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $854 | $272 | | Total current assets | $8,798 | $6,859 | | Total assets | $11,311 | $14,827 | | Total current liabilities | $17,059 | $37,790 | | Total liabilities | $20,403 | $42,555 | | Total stockholders' deficit | $(9,092) | $(27,728) | Key Operations Data (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Revenue, net | $10,145 | $5,020 | | Operating loss | $(14,245) | $(22,754) | | Net loss | $(13,685) | $(25,614) | | Net loss per share | $(0.16) | $(0.58) | Key Cash Flow Data (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(18,047) | $(19,788) | | Net cash (used in) provided by investing activities | $(290) | $11,469 | | Net cash provided by (used in) financing activities | $18,919 | $(16,957) | Notes to Consolidated Financial Statements Notes detail the 'Going Concern' uncertainty, revenue concentration in China, and significant commitments and subsequent events - The company's financial statements have been prepared under the assumption it will continue as a "going concern," but its history of recurring operating losses, working capital deficiencies, and negative cash flows raise substantial doubt about this ability (Note 1)[231][232] Revenue Disaggregation by Geography (2020) | Country | Revenue (in thousands) | % of Total | | :--- | :--- | :--- | | China | $7,876 | 78% | | United States | $2,269 | 22% | | Total | $10,145 | 100% | - The company has a commitment to advance up to $5.1 million to an unrelated entity in China to help market its integrated hardware/software products; an initial $1.5 million was advanced in 2020 and recorded as a marketing cost (Note 16)[345] - Subsequent to year-end, on February 10, 2021, the company entered into a new one-year, $5.0 million senior secured promissory note with a 15% interest rate (Note 18)[353]