Remark Holdings(MARK) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Remark Holdings reported a net loss of $14.0 million for the six months ended June 30, 2023, an improvement from $38.0 million in 2022, despite a 45% revenue decrease to $4.0 million, ending with $0.2 million cash and a $28.4 million stockholders' deficit, raising substantial doubt about its ability to continue as a going concern Condensed Consolidated Balance Sheets As of June 30, 2023, Remark Holdings had total assets of $12.9 million and total liabilities of $41.3 million, resulting in a total stockholders' deficit of $28.4 million, with cash critically low at $0.2 million and notes payable increasing to $16.5 million Condensed Consolidated Balance Sheet Data (in thousands) | Balance Sheet Item | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Cash | $208 | $52 | | Total current assets | $10,466 | $12,288 | | Total assets | $12,858 | $14,436 | | Total current liabilities | $40,889 | $34,805 | | Total liabilities | $41,287 | $34,861 | | Total stockholders' deficit | ($28,429) | ($20,425) | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss For the six months ended June 30, 2023, revenue decreased 45% year-over-year to $4.0 million, with a net loss of $14.0 million, significantly improved from $38.0 million in 2022 due to the absence of a $26.0 million investment loss, offset by a new $4.6 million finance cost Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $3,167 | $2,558 | $3,993 | $7,225 | | Operating Loss | ($3,959) | ($3,955) | ($7,002) | ($8,141) | | Finance cost related to obligations to issue common stock | ($1,050) | $0 | ($4,626) | $0 | | Loss on investment | $0 | ($6,952) | $0 | ($26,008) | | Net Loss | ($5,874) | ($12,529) | ($14,036) | ($37,958) | | Net Loss Per Share | ($0.42) | ($1.19) | ($1.02) | ($3.61) | Unaudited Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash used in operating activities was $5.2 million, an improvement from $11.1 million in the prior-year period, with net cash provided by financing activities at $5.4 million, ending with a cash balance of only $0.2 million Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($5,227) | ($11,082) | | Net cash provided by (used in) investing activities | ($6) | $2,644 | | Net cash provided by (used in) financing activities | $5,389 | ($4,686) | | Net change in cash | $156 | ($13,124) | | Cash at end of period | $208 | $1,063 | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the company's business structure, accounting policies, and critical financial situations, including a going concern warning, default on senior secured debt with Mudrick Capital, significant financing from Ionic Ventures, customer concentration risk, and a Nasdaq delisting notice - The company has a history of recurring operating losses, a stockholders' deficit of $28.4 million, and a cash balance of $0.2 million as of June 30, 2023, which raises substantial doubt about its ability to continue as a going concern[36][37] - The company defaulted on its loan agreement with Mudrick Capital. A new agreement was reached on March 14, 2023, converting the outstanding balance into new notes totaling $16.3 million at a 20.5% interest rate. A subsequent repayment was missed on June 30, 2023, constituting another event of default[85][88][91] - The company entered into multiple financing agreements with Ionic Ventures, LLC, including convertible debentures and an Equity Line of Credit (ELOC), resulting in proceeds of $5.5 million in the first half of 2023 but also creating significant obligations to issue a variable number of common shares, valued at $5.6 million as of June 30, 2023[93][94][105] - On July 24, 2023, Nasdaq granted the company an extension until October 24, 2023, to regain compliance with continued listing standards after failing to meet the minimum net income, stockholders' equity, or market value requirements[130] - For the six months ended June 30, 2023, three customers accounted for approximately 40%, 35%, and 11% of total revenue, indicating significant customer concentration risk[64] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial performance, highlighting a 45% revenue decrease for the first six months of 2023 due to slow China recovery, an improved net loss due to non-recurring investment loss, and reiterates substantial doubt about going concern, with future funding reliant on revenue growth and ELOC Results of Operations Revenue for the six months ended June 30, 2023, fell by $3.2 million (45%) to $4.0 million due to slow China recovery, while general and administrative expenses decreased by $1.8 million, and a new finance cost of $4.6 million was incurred, narrowing the net loss to $14.0 million from $38.0 million Comparison of Operating Results (in thousands) | Item | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $3,993 | $7,225 | ($3,232) | (45)% | | Cost of revenue | $2,966 | $6,117 | ($3,151) | (52)% | | General and administrative | $6,077 | $7,872 | ($1,795) | (23)% | | Finance cost related to obligations to issue common stock | ($4,626) | $0 | ($4,626) | N/A | | Loss on investment | $0 | ($26,008) | $26,008 | (100)% | | Net loss | ($14,036) | ($37,958) | $23,922 | (63)% | - The decrease in revenue for the six-month period was primarily due to the slow and methodical business and economic recovery in China after the lifting of COVID-19 restrictions[160] - General and administrative expenses decreased by $1.8 million, driven by a $1.0 million reduction in business development expenses and a $0.8 million decrease in share-based compensation expense[161] - A new finance cost of $4.6 million was incurred in the first six months of 2023, resulting from the establishment and remeasurement of obligations to issue common stock under agreements with Ionic[164] Liquidity and Capital Resources The company's liquidity is severely constrained with $0.2 million cash as of June 30, 2023, raising substantial doubt about its going concern ability, as it is in default on $16.3 million senior secured notes due October 31, 2023, relying on $5.5 million financing from Ionic for operations - The company's history of recurring operating losses, working capital deficiencies, and negative cash flows from operations give rise to substantial doubt about its ability to continue as a going concern[166][180] - The company is in default on its New Mudrick Notes, with an outstanding balance of $16.6 million as of the filing date, and does not have sufficient cash to repay the obligation due October 31, 2023[168][169][171] - During the first six months of 2023, the company received $2.5 million from Ionic in exchange for convertible debentures and an aggregate of $3.0 million under the ELOC Purchase Agreement[185] - Management's plans to meet ongoing requirements for the next 12 months include growing new product lines and obtaining additional capital through equity issuances, but projections are inherently uncertain[181][182] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable - Not applicable[188] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of June 30, 2023, due to previously identified material weaknesses in internal control over financial reporting, with remediation efforts ongoing but slow - Management concluded that disclosure controls and procedures were not effective as of June 30, 2023[190] - The ineffectiveness is due to previously disclosed material weaknesses in internal control over financial reporting, including issues with journal entries, revenue recognition in China, monitoring controls, and inventory valuation[190] - No material changes were made to internal controls during the quarter, and the implementation of the remediation plan continues to be slow[191] PART II - OTHER INFORMATION Legal Proceedings The company reports no material pending legal proceedings - None[192] Risk Factors The company highlights significant risks including a history of operating losses, potential inability to generate sufficient revenue, critical risk of not repaying $16.3 million senior secured debt due October 31, 2023, and high dependence on a small number of customers - The company has a history of operating losses, an accumulated deficit of $402.6 million as of June 30, 2023, and may not generate sufficient revenue to sustain operations[193] - The company may not have sufficient cash to repay its $16.3 million in outstanding senior secured debt due October 31, 2023, and is currently in default, which could lead to foreclosure on all company assets[195][196] - The company is dependent on a small number of customers. During the six months ended June 30, 2023, three customers represented about 40%, 35%, and 11% of revenue, respectively[197] Unregistered Sales of Equity Securities and Use of Proceeds On April 12, 2023, the company issued a convertible subordinated debenture to Ionic Ventures, LLC for a purchase price of $1,000,000 in a private placement - On April 12, 2023, the company issued a convertible subordinated debenture to Ionic Ventures, LLC for a purchase price of $1,000,000 in a private placement[198] Defaults Upon Senior Securities The company confirms it is in default on its senior securities, having missed a required repayment under the New Mudrick Loan Agreement on June 30, 2023, with an outstanding balance of approximately $16.6 million - The company defaulted on the New Mudrick Loan Agreement by failing to make a required repayment by June 30, 2023[199] - As of the filing date, the company has not received a waiver for the default and is in discussions with the lender. The outstanding balance is approximately $16.6 million[199] Other Information The company reports no other information - None[200] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer, and XBRL data files