Remark Holdings(MARK) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section covers the company's financial statements, management's discussion, market risk disclosures, and internal controls Financial Statements Unaudited consolidated financial statements reveal a $46.9 million net loss, $0.4 million cash, and a $14.7 million stockholders' deficit Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | Cash | $376 | $14,187 | | Total Current Assets | $14,854 | $74,512 | | Total Assets | $16,688 | $75,503 | | Total Current Liabilities | $31,353 | $44,444 | | Total Liabilities | $31,378 | $44,469 | | Total Stockholders' Equity (Deficit) | $(14,690) | $31,034 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Revenue | $10,037 | $9,656 | | Operating Loss | $(14,868) | $(12,795) | | Gain (Loss) on Investment | $(26,356) | $78,917 | | Net Income (Loss) | $(46,882) | $65,724 | | Net Income (Loss) per Share, basic | $(0.45) | $0.66 | - Net cash used in operating activities was $13.6 million for the nine months ended September 30, 2022, compared to $10.1 million in the prior-year period. The company's cash balance decreased from $14.2 million at the beginning of the period to $0.4 million at the end[19] Notes to Unaudited Condensed Consolidated Financial Statements Notes detail VIE termination, going concern doubt, Sharecare investment liquidation, and senior loan default - The company terminated its Variable Interest Entity (VIE) structure in China, obtaining 100% equity ownership of the entities effective September 19, 2022, which are now consolidated as wholly-owned subsidiaries[24] - Management has concluded there is substantial doubt about the company's ability to continue as a going concern due to a history of recurring operating losses, a stockholders' deficit of $14.7 million, and a cash balance of only $0.4 million as of September 30, 2022[37][38] - The company's investment in Sharecare was fully liquidated during 2022. Shares were sold for $6.3 million in cash, and the remaining shares (valued at $9.7 million) were transferred to lenders to partially settle debt, resulting in a net loss on investment of $26.4 million for the nine-month period[77][78][79] - The company defaulted on its senior secured loans from Mudrick Capital by failing to make the required repayment by the October 31, 2022 maturity date. The outstanding principal was $14.4 million as of September 30, 2022[92][95] - Subsequent to the quarter's end, the company entered into significant new financing agreements with Ionic Ventures, including a $2.78 million convertible debenture and a $50 million equity line of credit (ELOC), and received a temporary waiver from Mudrick before defaulting again[120][125][130] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses AI business, 'Zero-COVID' impact, a $46.9 million net loss, and critical liquidity issues Our Business The company's AI software and computer vision business is severely impacted by China's 'Zero-COVID' policy; VIE terminated - The company's business is centered on its proprietary AI software platform, delivering computer vision products and solutions for retail, urban life cycle, workplace safety, railway safety, and biosafety markets[147][148][151] - China's "Zero-COVID" policy, with its city-wide lockdowns, has significantly limited the operational capabilities of the company's China-based subsidiaries and had a material adverse impact on business[157] - Effective September 19, 2022, the company terminated its VIE structure in China and now holds 100% equity ownership of the entities it formerly consolidated as VIEs[136] Results of Operations Financial performance shows slight revenue growth but a significant $46.9 million net loss, driven by investment losses Revenue and Net Loss Comparison (in thousands) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $10,037 | $9,656 | $381 | 4% | | Cost of Revenue | $8,576 | $5,858 | $2,718 | 46% | | General & Administrative | $14,598 | $10,672 | $3,926 | 37% | | Gain (Loss) on Investment | $(26,356) | $78,917 | $(105,273) | (133)% | | Net Loss | $(46,882) | $65,724 | $(112,606) | (171)% | - The shift from a $78.9 million gain on investment in the first nine months of 2021 to a $26.4 million loss in the same period of 2022 was the primary driver for the significant increase in net loss[171] - General and administrative expenses increased by $3.9 million year-over-year, primarily due to a $2.3 million increase in the reserve for doubtful accounts related to China's Zero-COVID policy lockdowns[169] Liquidity and Capital Resources Severe liquidity challenges include going concern doubt, a $14.7 million deficit, $0.4 million cash, and loan default - The company's financial condition raises substantial doubt about its ability to continue as a going concern, citing recurring operating losses, a stockholders' deficit of $14.7 million, and a cash balance of only $0.4 million as of September 30, 2022[173][182] - The company defaulted on its Mudrick Loans by failing to make the required repayment by the October 31, 2022 maturity date. The outstanding principal and interest at the time of filing was $14.4 million[178] - To address liquidity issues, the company entered into post-quarter end financing agreements with Ionic Ventures for a convertible debenture (raising $2.5 million) and a potential $50 million equity line of credit (ELOC)[179][180] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable for the company as a smaller reporting company, indicating no material market risk exposure - The company states this section is "Not applicable"[190] Controls and Procedures Disclosure controls were ineffective due to material weaknesses in internal control over financial reporting, with slowed remediation - Management concluded that disclosure controls and procedures were not effective at a reasonable assurance level as of September 30, 2022[192] - The ineffectiveness is due to ongoing material weaknesses related to: (i) review of manual journal entries, (ii) revenue recognition for China AI contracts, (iii) various control deficiencies in the China AI business, and (iv) inventory valuation[192] - Implementation of the remediation plan has been slowed by various factors, including the COVID-19 pandemic, and no material changes were made to internal controls during the quarter[193] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered equity sales, senior securities defaults, and exhibits Legal Proceedings The company reports no material pending legal proceedings - The company reports "None" for material legal proceedings[194] Risk Factors Significant customer concentration risk exists, with two customers accounting for 78% of total revenue - The company faces significant customer concentration risk. During the nine months ended September 30, 2022, two customers represented approximately 55% and 23% of total revenue, respectively[196] - As of September 30, 2022, accounts receivable from two customers represented about 32% and 18% of gross accounts receivable, respectively[196] Unregistered Sales of Equity Securities and Use of Proceeds A single unregistered sale of 1,250,000 common shares occurred for services rendered - On September 2, 2022, the company issued 1,250,000 shares of its common stock, with a fair value of $0.5 million, to a vendor for services performed[197] Defaults Upon Senior Securities The company defaulted on senior secured loans by failing to repay $14.7 million by the October 31, 2022 maturity date - The company defaulted on the Mudrick Loan Agreements by failing to repay the outstanding loans by the maturity date of October 31, 2022[198] - As of the date of the Form 10-Q filing, the outstanding principal and interest on the defaulted loan was $14.7 million[198] Other Information The company reports no other material information for this item - The company reports "None" for this item[199] Exhibits Key exhibits include the 2022 Incentive Plan and new financing agreements with Ionic Ventures, LLC - Key exhibits filed include new financing documents with Ionic Ventures, LLC, such as the Debenture Purchase Agreement and the ELOC Purchase Agreement, both dated October 6, 2022[200]