Remark Holdings(MARK) - 2022 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Unaudited statements show a significant net loss and stockholders' deficit, raising substantial doubt about the company's ability to continue as a going concern Condensed Consolidated Balance Sheets The balance sheet reflects a sharp decline in cash and total assets, shifting stockholders' equity to a significant deficit Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash | $1,063 | $14,187 | | Investment in marketable securities | $12,532 | $42,349 | | Total current assets | $31,379 | $74,512 | | Total assets | $33,361 | $75,503 | | Total liabilities | $39,683 | $44,469 | | Total stockholders' equity (deficit) | $(6,322) | $31,034 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss Operations resulted in lower revenue and a substantially increased net loss, driven by a significant loss on investment Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $2,558 | $4,016 | $7,225 | $8,422 | | Operating loss | $(3,955) | $(2,470) | $(8,141) | $(6,130) | | Loss on investment | $(6,952) | $— | $(26,008) | $— | | Net loss | $(12,529) | $(1,561) | $(37,958) | $(7,022) | | Net loss per share | $(0.12) | $(0.02) | $(0.36) | $(0.07) | Unaudited Condensed Consolidated Statements of Stockholders' Equity (Deficit) Stockholders' equity shifted from a $31.0 million surplus to a $6.3 million deficit, primarily due to a large net loss - Total stockholders' equity decreased from a positive $31.0 million to a deficit of $6.3 million as of June 30, 2022[16] - The decrease was primarily driven by a net loss of $38.0 million for the six-month period[16] Unaudited Condensed Consolidated Statements of Cash Flows Cash flows show a significant increase in cash used for operations, leading to a net cash decrease of $13.1 million Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(11,082) | $(6,271) | | Net cash provided by (used in) investing activities | $2,644 | $(54) | | Net cash (used in) provided by financing activities | $(4,686) | $5,593 | | Net change in cash | $(13,124) | $(732) | | Cash at end of period | $1,063 | $122 | Notes to Unaudited Condensed Consolidated Financial Statements Notes highlight significant risks including its VIE structure, going concern doubts, investment losses, and high-interest debt - The company operates a significant portion of its business in China through a Variable Interest Entity (VIE) structure, which carries legal and regulatory risks[21][22][23] - Management has concluded there is substantial doubt about the company's ability to continue as a going concern due to recurring losses and a stockholders' deficit[42][43] - The company's investment in New Sharecare was valued at $12.5 million, reflecting a $26.0 million loss during the first six months of 2022[81] - The company had $23.8 million in notes payable outstanding, primarily from high-interest Mudrick Loans[96] - Subsequent to the quarter, the company prepaid part of the Mudrick Loans, which had its interest rate increased to 18.5% and maturity extended[125][126] - The company received a Nasdaq notice for failing to maintain a minimum bid price of $1.00 per share[102] Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion attributes a 14% revenue decline and a significant net loss to investment write-downs and higher interest expense Our Business The company delivers AI-based computer vision solutions through its Remark AI and KanKan AI businesses while planning to sell its e-commerce unit - The company's primary business is delivering AI-based computer vision products through its US and Asia-Pacific businesses[148] - Key AI solutions target markets such as retail, smart communities, workplace safety, and biosafety[150][151][153][154] - The company plans to sell its Bikini.com e-commerce business and is developing a metaverse to explore new revenue streams[157] Overall Business Outlook The company sees growth opportunities for its AI products but faces material adverse impacts from China's 'Zero-COVID' policy - The company sees growth opportunities in the Asia-Pacific, U.S., and European markets for its AI products[158] - China's 'Zero-COVID' policy and associated lockdowns have had a material adverse impact on the business[159] Results of Operations Revenue declined 14% while net loss widened by 441%, driven by investment losses and a 544% increase in interest expense Change in Operating Results for Six Months Ended June 30, 2022 vs 2021 (in thousands) | Account | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $7,225 | $8,422 | $(1,197) | (14)% | | Cost of revenue | $6,117 | $5,004 | $1,113 | 22% | | General and administrative | $7,872 | $5,179 | $2,693 | 52% | | Interest expense | $(3,960) | $(615) | $(3,345) | 544% | | Loss on investment | $(26,008) | $— | $(26,008) | N/A | | Net loss | $(37,958) | $(7,022) | $(30,936) | 441% | - The increase in General and Administrative expense was primarily due to higher share-based compensation ($0.9M) and other business costs[172][173] - The significant increase in interest expense was caused by the $30.0 million Mudrick loan executed in December 2021[173] Liquidity and Capital Resources With a cash balance of only $1.1 million and recurring losses, there is substantial doubt about the company's ability to continue as a going concern - The company has a history of recurring operating losses, resulting in a cash balance of only $1.1 million as of June 30, 2022[176] - There is substantial doubt about the company's ability to continue as a going concern[179] - Future operations will be funded through revenue growth, the sale of the Bikini.com subsidiary, and potential financings[180][181] - The Mudrick Loan maturity was extended to October 31, 2022, and the interest rate was increased to 18.5% per annum[178][179] Quantitative and Qualitative Disclosures About Market Risk The company states that this section is not applicable - The company has indicated that this disclosure is not applicable[187] Controls and Procedures Management concluded that disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting - Management concluded that disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2022[189] - The ineffectiveness is due to material weaknesses in internal control, primarily related to processes in the AI business in China[189] - No material changes were made to internal controls during the quarter, and remediation of the weaknesses is ongoing[190] PART II - OTHER INFORMATION Legal Proceedings The company reports that there were no material pending legal proceedings as of the end of the reporting period - The company reports no material legal proceedings[192] Risk Factors This section directs investors to the risk factors previously disclosed in the company's 2021 Annual Report on Form 10-K - The company refers investors to the risk factors discussed in its 2021 Form 10-K[192] Unregistered Sales of Equity Securities and Use of Proceeds The company states that it did not issue any unregistered equity securities during the period covered by this report - No unregistered equity securities were issued during the quarter[192] Defaults Upon Senior Securities The company indicates that this item is not applicable - Not applicable[193] Mine Safety Disclosures The company indicates that this item is not applicable - Not applicable[193] Other Information The company reports no information for this item - None[193] Exhibits This section lists the exhibits filed with the report, including an amendment to a loan agreement and executive certifications - Exhibit 10.1 is the First Amendment to the Senior Secured Loan Agreement, dated August 3, 2022[196] - Exhibits 31.1, 31.2, and 32 are the CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002[196]