REMARK HOLDINGS, INC. - Quarter Report: 2023 June (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2023
![remarkholdingslogo.jpg](https://www.sec.gov/Archives/edgar/data/0001368365/000136836523000065/mark-20230630_g1.jpg)
Commission File Number 001-33720
Remark Holdings, Inc.
Delaware | 33-1135689 | |||||||||||||
State of Incorporation | IRS Employer Identification Number |
800 S. Commerce St.
Las Vegas, NV 89106
Address, including zip code, of principal executive offices
702-701-9514
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Common Stock, $0.001 par value per share | MARK | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
Non-accelerated filer | ☑ | Smaller reporting company | ☑ | |||||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of August 11, 2023, a total of 18,297,600 shares of our common stock were outstanding.
TABLE OF CONTENTS
PART I | ||||||||
Item 1. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
PART II | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 5. | ||||||||
Item 6. | ||||||||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following information should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”) and our audited consolidated financial statements and related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on April 17, 2023 (the “2022 Form 10-K”).
In addition to historical information, this Form 10-Q includes “forward-looking statements” about the plans, strategies, objectives, goals or expectations of Remark Holdings, Inc. and subsidiaries (“Remark”, “we”, “us”, “our”). You will find forward-looking statements principally in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Such forward-looking statements are identifiable by words or phrases indicating that Remark or management “expects,” “anticipates,” “plans,” “believes,” or “estimates,” or that a particular occurrence or event “will,” “may,” “could,” “should,” or “will likely” result, occur or be pursued or “continue” in the future, that the “outlook” or “trend” is toward a particular result or occurrence, that a development is an “opportunity,” “priority,” “strategy,” “focus,” that we are “positioned” for a particular result, or similarly-stated expectations. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report or such other report, release, presentation, or statement. The forward-looking statements contained in this Form 10-Q are based on the expectations, estimates, projections, beliefs, and assumptions of our management based on information available to management as of the date on which this Form 10-Q was filed with the SEC, or as of the date on which the information incorporated by reference was filed with the SEC, as applicable, all of which are subject to change. Forward-looking statements are subject to risks, uncertainties, and other factors that are difficult to predict and could cause actual results to differ materially from those stated or implied by our forward-looking statements.
In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this report and other periodic reports filed with the SEC, there are many important factors that could cause actual results to differ materially. Such risks and uncertainties include general business conditions, changes in overall economic conditions, our ability to integrate acquired assets, the impact of competition and other factors which are often beyond our control.
This should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, operations, liquidity, financial condition and prospects. We undertake no obligation to update or revise our forward-looking statements to reflect developments that occur or information that we obtain after the date of this report.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
June 30, 2023 | December 31, 2022 | ||||||||||
(Unaudited) | |||||||||||
Assets | |||||||||||
Cash | $ | 208 | $ | 52 | |||||||
Trade accounts receivable, net | 3,445 | 3,091 | |||||||||
Inventory, net | 351 | 308 | |||||||||
Deferred cost of revenue | 5,598 | 7,463 | |||||||||
Prepaid expense and other current assets | 864 | 1,374 | |||||||||
Total current assets | 10,466 | 12,288 | |||||||||
Property and equipment, net | 1,422 | 1,699 | |||||||||
Operating lease assets | 783 | 180 | |||||||||
Other long-term assets | 187 | 269 | |||||||||
Total assets | $ | 12,858 | $ | 14,436 | |||||||
Liabilities | |||||||||||
Accounts payable | $ | 9,125 | $ | 9,602 | |||||||
Advances from related parties | 1,078 | 1,174 | |||||||||
Obligations to issue common stock | 5,597 | 1,892 | |||||||||
Accrued expense and other current liabilities | 8,189 | 7,222 | |||||||||
Contract liability | 420 | 308 | |||||||||
Notes payable | 16,480 | 14,607 | |||||||||
Total current liabilities | 40,889 | 34,805 | |||||||||
Operating lease liabilities, long-term | 398 | 56 | |||||||||
Total liabilities | 41,287 | 34,861 | |||||||||
Commitments and contingencies | |||||||||||
Stockholders’ Deficit | |||||||||||
Preferred stock, $0.001 par value; 1,000,000 shares authorized; zero issued | — | — | |||||||||
Common stock, $0.001 par value; 175,000,000 shares authorized; 16,612,266 and 11,539,564 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | 17 | 12 | |||||||||
Additional paid-in-capital | 375,517 | 368,945 | |||||||||
Accumulated other comprehensive loss | (1,404) | (859) | |||||||||
Accumulated deficit | (402,559) | (388,523) | |||||||||
Total stockholders’ deficit | (28,429) | (20,425) | |||||||||
Total liabilities and stockholders’ deficit | $ | 12,858 | $ | 14,436 |
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(dollars in thousands, except per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
$ | 3,167 | $ | 2,558 | $ | 3,993 | $ | 7,225 | ||||||||||||||||
Cost and expense | |||||||||||||||||||||||
Cost of revenue (excluding depreciation and amortization) | 2,511 | 1,847 | 2,966 | 6,117 | |||||||||||||||||||
Sales and marketing | 387 | 188 | 753 | 336 | |||||||||||||||||||
Technology and development | 567 | 508 | 736 | 963 | |||||||||||||||||||
General and administrative | 3,244 | 3,933 | 6,077 | 7,872 | |||||||||||||||||||
Depreciation and amortization | 25 | 37 | 71 | 78 | |||||||||||||||||||
Impairments | 392 | — | 392 | — | |||||||||||||||||||
Total cost and expense | 7,126 | 6,513 | 10,995 | 15,366 | |||||||||||||||||||
Operating loss | (3,959) | (3,955) | (7,002) | (8,141) | |||||||||||||||||||
Other income (expense) | |||||||||||||||||||||||
Interest expense | (858) | (1,774) | (2,402) | (3,960) | |||||||||||||||||||
Finance cost related to obligations to issue common stock | (1,050) | — | (4,626) | — | |||||||||||||||||||
Loss on investment | — | (6,952) | — | (26,008) | |||||||||||||||||||
Other gain, net | (7) | 152 | (6) | 151 | |||||||||||||||||||
Total other expense, net | (1,915) | (8,574) | (7,034) | (29,817) | |||||||||||||||||||
Net loss | $ | (5,874) | $ | (12,529) | $ | (14,036) | $ | (37,958) | |||||||||||||||
Other comprehensive income | |||||||||||||||||||||||
Foreign currency translation adjustments | (227) | (424) | (545) | (422) | |||||||||||||||||||
Comprehensive loss | $ | (6,101) | $ | (12,953) | $ | (14,581) | $ | (38,380) | |||||||||||||||
Weighted-average shares outstanding, basic and diluted | 14,132,862 | 10,515,777 | 13,819,643 | 10,515,777 | |||||||||||||||||||
Net loss per share, basic and diluted | $ | (0.42) | $ | (1.19) | $ | (1.02) | $ | (3.61) | |||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands, except number of shares)
Three Months Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||
Common Stock Shares | Common Stock Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||
Balance at March 31, 2023 | 13,633,992 | $ | 14 | $ | 372,071 | $ | (1,177) | $ | (396,685) | (25,777) | |||||||||||||||||||||||||
Net loss | — | — | — | — | (5,874) | (5,874) | |||||||||||||||||||||||||||||
Share-based compensation | — | — | 12 | — | — | 12 | |||||||||||||||||||||||||||||
2,978,274 | 3 | 3,434 | — | — | 3,437 | ||||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | (227) | — | (227) | |||||||||||||||||||||||||||||
Balance at June 30, 2023 | 16,612,266 | $ | 17 | $ | 375,517 | $ | (1,404) | $ | (402,559) | $ | (28,429) | ||||||||||||||||||||||||
Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
Common Stock Shares | Common Stock Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||
Balance at March 31, 2022 | 10,515,777 | $ | 11 | $ | 364,847 | $ | (268) | $ | (358,469) | $ | 6,121 | ||||||||||||||||||||||||
Net loss | — | — | — | — | (12,529) | (12,529) | |||||||||||||||||||||||||||||
Share-based compensation | — | — | 510 | — | — | 510 | |||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | (424) | — | (424) | |||||||||||||||||||||||||||||
Balance at June 30, 2022 | 10,515,777 | $ | 11 | $ | 365,357 | $ | (692) | $ | (370,998) | $ | (6,322) | ||||||||||||||||||||||||
Six Months Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||
Common Stock Shares | Common Stock Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||
Balance at December 31, 2022 | 11,539,564 | $ | 12 | $ | 368,945 | $ | (859) | $ | (388,523) | $ | (20,425) | ||||||||||||||||||||||||
Net loss | — | — | — | — | (14,036) | (14,036) | |||||||||||||||||||||||||||||
Share-based compensation | — | — | 156 | — | — | 156 | |||||||||||||||||||||||||||||
5,072,702 | 5 | 6,416 | — | — | 6,421 | ||||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | (545) | — | (545) | |||||||||||||||||||||||||||||
Balance at June 30, 2023 | 16,612,266 | $ | 17 | $ | 375,517 | $ | (1,404) | $ | (402,559) | $ | (28,429) | ||||||||||||||||||||||||
Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
Common Stock Shares | Common Stock Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 10,515,777 | $ | 11 | $ | 364,333 | $ | (270) | $ | (333,040) | $ | 31,034 | ||||||||||||||||||||||||
Net loss | — | — | — | — | (37,958) | (37,958) | |||||||||||||||||||||||||||||
Share-based compensation | — | — | 1,024 | — | — | 1,024 | |||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | (422) | — | (422) | |||||||||||||||||||||||||||||
Balance at June 30, 2022 | 10,515,777 | $ | 11 | $ | 365,357 | $ | (692) | $ | (370,998) | $ | (6,322) |
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
Six Months Ended June 30, | |||||||||||
2023 | 2022 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | (14,036) | $ | (37,958) | |||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
Depreciation, amortization and impairments | 71 | 78 | |||||||||
Share-based compensation | 153 | 759 | |||||||||
Amortization of debt issuance costs and discount | — | 1,870 | |||||||||
Cost of extending note payable | 750 | — | |||||||||
Finance cost related to obligations to issue common stock | 4,626 | — | |||||||||
Accrued interest included in note payable | 1,139 | — | |||||||||
Loss on investment | — | 26,008 | |||||||||
Impairment of long-lived assets | 392 | — | |||||||||
Provision for doubtful accounts | 138 | — | |||||||||
Other | 36 | (25) | |||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | (957) | 221 | |||||||||
Inventory | (42) | (146) | |||||||||
Deferred cost of revenue | 1,865 | (4,474) | |||||||||
Prepaid expense and other assets | 13 | 3,873 | |||||||||
Operating lease assets | (607) | 5 | |||||||||
Accounts payable, accrued expense and other liabilities | 745 | (1,169) | |||||||||
Contract liability | 145 | (142) | |||||||||
Operating lease liabilities | 342 | 18 | |||||||||
Net cash used in operating activities | (5,227) | (11,082) | |||||||||
Cash flows from investing activities: | |||||||||||
Proceeds from sale of investment | — | 3,809 | |||||||||
Purchases of property, equipment and software | (6) | (166) | |||||||||
Payment of amounts capitalized to software in progress | — | (999) | |||||||||
Net cash provided by (used in) investing activities | (6) | 2,644 | |||||||||
Cash flows from financing activities: | |||||||||||
Proceeds from issuance of common stock, net | — | — | |||||||||
Proceeds from obligations to issue common stock - ELOC | 3,000 | — | |||||||||
Proceeds from obligations to issue common stock - Debentures | 2,500 | — | |||||||||
Advances from related parties | 697 | 1,517 | |||||||||
Repayments of advances from related parties | (792) | — | |||||||||
Repayments of debt | (16) | (6,203) | |||||||||
Net cash provided by (used in) financing activities | 5,389 | (4,686) | |||||||||
Net change in cash | 156 | (13,124) | |||||||||
Cash: | |||||||||||
Beginning of period | 52 | 14,187 | |||||||||
End of period | $ | 208 | $ | 1,063 | |||||||
Supplemental cash flow information: | |||||||||||
Cash paid for interest | $ | 988 | $ | 2,147 | |||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2023 and 2022
NOTE 1. ORGANIZATION AND BUSINESS
Organization and Business
Remark Holdings, Inc. and its subsidiaries (“Remark”, “we”, “us”, or “our”) constitute a diversified global technology business with leading artificial intelligence (“AI”) and data-analytics solutions. The common stock of Remark Holdings, Inc. is listed on the Nasdaq Capital Market (“Nasdaq”) under the trading symbol MARK.
We primarily sell AI-based products and services. We currently recognize substantially all of our revenue from China, with additional revenue from sales in the U.S.
On December 21, 2022, we effected a 1-for-10 reverse split of our common stock (the “Reverse Split”). All references made to share or per share amounts in these financial statements have been retroactively adjusted to reflect the effects of the Reverse Split.
Corporate Structure
We are a holding company incorporated in Delaware and not a Chinese operating company. As a holding company, we conduct most of our operations through our subsidiaries, each of which is wholly owned. Until September 2022, we had historically conducted a significant part of our operations through contractual arrangements between our wholly-foreign-owned enterprise (“WFOE”) and certain variable interest entities (“VIEs”) based in China to address challenges resulting from laws, policies and practices that may disfavor foreign-owned entities that operate within industries deemed sensitive by the Chinese government. We were the primary beneficiary of the VIEs because the contractual arrangements governing the relationship between the VIEs and our WFOE, which included an exclusive call option agreement, exclusive business cooperation agreement, a proxy agreement and an equity pledge agreement, enabled us to (i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive call option to purchase, at any time, all or part of the equity interests in and/or assets of the VIEs to the extent permitted by Chinese laws. Because we were the primary beneficiary of the VIEs, we consolidated the financial results of the VIEs in our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”).
We terminated all of the contractual arrangements between the WFOE and the VIEs and exercised our rights under the exclusive call option agreements between the WFOE and the VIEs such that, effective as of September 19, 2022, we obtained 100% of the equity ownership of the entities we formerly consolidated as VIEs and which we now consolidate as wholly-owned subsidiaries.
The following diagram illustrates our corporate structure, including our significant subsidiaries, as of the date of this Form 10-Q. The diagram omits certain entities which are immaterial to our results of operations and financial condition.
![Remark Org Chart - Oct 2022 No VIE.jpg](https://www.sec.gov/Archives/edgar/data/0001368365/000136836523000065/mark-20230630_g2.jpg)
We are subject to certain legal and operational risks associated with having a significant portion of our operations in China. Chinese laws and regulations governing our current business operations, including the enforcement of such laws and regulations, are sometimes vague and uncertain and can change quickly with little advance notice. The Chinese government may intervene in or influence the operations of our China-based subsidiaries at any time and may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our securities. In addition, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors and cause the value of such securities to
significantly decline or become worthless. In recent years, the Chinese government adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to the use of variable interest entities, cybersecurity, data security, export control and anti-monopoly concerns. As of the date of this Form 10-Q, we have neither been involved in any investigations on cybersecurity review initiated by any Chinese regulatory authority, nor received any inquiry, notice or sanction. As of the date of this Form 10-Q, no relevant laws or regulations in China explicitly require us to seek approval from the China Securities Regulatory Commission (“CSRC”) for any securities listing. As of the date of this Form 10-Q, we have not received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other Chinese governmental authorities relating to securities listings. However, since these statements and regulatory actions are newly published, official guidance and related implementation rules have not all been issued. It is highly uncertain what potential impact such modified or new laws and regulations will have on our ability to conduct our business, accept investments or list or maintain a listing on a U.S. or foreign exchange.
As of the date of this Form 10-Q, we are not required to seek permissions from the CSRC, the Cyberspace Administration of China (the “CAC”), or any other entity that is required to approve our operations in China. Nevertheless, Chinese regulatory authorities may in the future promulgate laws, regulations or implement rules that require us or our subsidiaries to obtain permissions from such regulatory authorities to approve our operations or any securities listing.
Holding Foreign Companies Accountable Act
The Holding Foreign Companies Accountable Act (the “HFCA Act”) was enacted on December 18, 2020. The HFCA Act states that if the Securities and Exchange Commission (the “SEC”) determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the Public Company Accounting Oversight Board (the “PCAOB”) for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market in the United States. On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction. The Consolidated Appropriations Act, 2023, which was signed into law on December 29, 2022, amended the HFCA Act to reduce the number of consecutive non-inspection years required to trigger the trading prohibition under the HFCA Act from three years to two years.
On December 16, 2021, the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by Chinese and Hong Kong authorities in those jurisdictions.
On August 26, 2022, the CSRC, the Ministry of Finance of the PRC, and the PCAOB signed a Statement of Protocol (the “Protocol”), taking the first step toward opening access for the PCAOB to completely inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong.
On December 15, 2022, the PCAOB vacated its 2021 determination that the positions taken by authorities in mainland China and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions. In view of the PCAOB’s decision to vacate its 2021 determination and until such time as the PCAOB issues any new adverse determination, the SEC has stated that there are no issuers at risk of having their securities subject to a trading prohibition under the HFCA Act. Each year, the PCAOB will reassess its determinations on whether it can inspect and investigate completely audit firms in China, and if, in the future, the PCAOB determines it cannot do so, or if Chinese authorities do not allow the PCAOB complete access for inspections and investigations for two consecutive years, companies engaging China-based public accounting firms would be delisted pursuant to the HFCA Act.
Our auditor, Weinberg & Company, an independent registered public accounting firm headquartered in the United States is currently subject to PCAOB inspections and has been inspected by the PCAOB on a regular basis. However, if the PCAOB is unable to inspect the work papers of our accounting firm in the future, such lack of inspection could cause trading in our common stock to be prohibited under the HFCA Act, and as a result, an exchange may determine to delist our common stock. The delisting and the cessation of trading of our common stock, or the threat of our common stock being delisted and prohibited from being traded, may materially and adversely affect the value of our common stock.
Transfer of Cash or Assets
Dividend Distributions
As of the date of this Form 10-Q, none of our subsidiaries have made any dividends or distributions to Remark.
We have never declared or paid dividends or distributions on our common equity. We currently intend to retain all available funds and any future consolidated earnings to fund our operations and continue the development and growth of our business; therefore, we do not anticipate paying any cash dividends.
Under Delaware law, a Delaware corporation’s ability to pay cash dividends on its capital stock requires the corporation to have either net profits or positive net assets (total assets less total liabilities) over its capital. If we determine to pay dividends on any of our common stock in the future, as a holding company, we may rely on dividends and other distributions on equity from our subsidiaries for cash requirements, including the funds necessary to pay dividends and other cash contributions to our stockholders.
Our WFOE’s ability to distribute dividends is based upon its distributable earnings. Current Chinese regulations permit our WFOE to pay dividends to its shareholder only out of its registered capital amount, if any, as determined in accordance with Chinese accounting standards and regulations, and then only after meeting the requirement regarding statutory reserve. If our WFOE incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Any limitation on the ability of our WFOE to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business. In addition, any cash dividends or distributions of assets by our WFOE to its stockholder are subject to a Chinese withholding tax of as much as 10%.
The Chinese government also imposes controls on the conversion of Chinese Renminbi (“RMB”) into foreign currencies and the remittance of currencies out of China. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. If we are unable to receive all of the revenues from our operations through our China-based subsidiaries, we may be unable to pay dividends on our common stock.
COVID-19
Our consolidated financial statements for the six months ended June 30, 2023 continued to show the negative impact that the COVID-19 pandemic has had on our business. Preventative measures related to COVID-19 outbreaks may continue to adversely affect our business and financial results, as could economic and geopolitical conditions in some international regions, and we do not yet know what will be the ultimate effects on our business. The COVID-19 pandemic caused a broad shift towards remote working arrangements for many businesses worldwide and injected uncertainty and delay into decision-making processes for such businesses. Though the most restrictive preventative measures have been eased in China, city-wide lockdowns, travel restrictions, closures of non-essential businesses and other quarantine measures could be reinstituted at any time. Recovering from the effects of the preventative measures in China that resulted from the Chinese government’s Zero-COVID policy and that significantly limited the operational capabilities of our China-based subsidiaries has taken some time as we and our customers and partners work to ramp up business again. Many cities across large swaths of China, including economically significant regions such as Shanghai, as recently as the end of 2022 were fully or partially locked down for weeks or even months. Such lockdowns have had a material adverse impact on our business, including on the collection of our accounts receivable and our ability to complete projects in China to generate revenue, and may continue to adversely impact our business until customers and potential customers believe they can operate and expand their businesses without fear of lockdowns or other severely restrictive preventative measures.
The full extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including resurgences and further spread of existing or new COVID-19 variants, the duration of any remaining preventative measures implemented by domestic and foreign governments, the impact on capital and financial markets and the related impact on the financial circumstances of our customers, all of which are highly uncertain and cannot be predicted. The pandemic-related situation continues to change rapidly, and additional impacts of which we are not currently aware may arise. We are closely monitoring worldwide developments and are continually assessing the potential impact on our business.
Going Concern
During the six months ended June 30, 2023, and in each fiscal year since our inception, we have incurred operating losses which have resulted in a stockholders’ deficit of $28.4 million as of June 30, 2023. Additionally, our operations have historically used more cash than they have provided. Net cash used in operating activities was $5.2 million during the six months ended June 30, 2023. As of June 30, 2023, our cash balance was $0.2 million. Also, we did not make a required repayment of the outstanding loans under the New Mudrick Loan Agreement when due (see Note 10 for more information).
Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities give rise to, and management has concluded that there is, substantial doubt regarding our ability to continue as a going concern. Our independent registered public accounting firm, in its report on our consolidated financial statements for the year ended December 31, 2022, has also expressed substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We intend to fund our future operations and meet our financial obligations through revenue growth from our AI and data analytics offerings. We cannot, however, provide assurance that revenue, income and cash flows generated from our businesses will be sufficient to sustain our operations in the twelve months following the filing of this Form 10-Q. As a result, we are actively evaluating strategic alternatives including debt and equity financings.
Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (in particular, as a result of the COVID-19 pandemic, global supply chain disruptions, inflation and other cost increases, and the geopolitical conflict in Ukraine), will play primary roles in determining whether we can successfully obtain additional capital. We cannot be certain that we will be successful at raising additional capital.
A variety of factors, many of which are outside of our control, affect our cash flow; those factors include the effects of the COVID-19 pandemic, regulatory issues, competition, financial markets and other general business conditions. Based on financial projections, we believe that we will be able to meet our ongoing requirements for at least the next 12 months with existing cash and based on the probable success of one or more of the following plans:
•develop and grow new product line(s)
•obtain additional capital through debt and/or equity issuances.
However, projections are inherently uncertain and the success of our plans is largely outside of our control. As a result, there is substantial doubt regarding our ability to continue as a going concern, and we may fully utilize our cash resources prior to September 30, 2023.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of June 30, 2023, with the audited Consolidated Balance Sheet amounts as of December 31, 2022 presented for comparative purposes, and the related unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss, the Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Stockholders’ Deficit in accordance with the instructions for Form 10-Q. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP, though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.
Our results of operations and our cash flows as of the end of the interim periods reported herein do not necessarily indicate the results we may experience for the remainder of the year or for any other future period.
Management believes that we have included all adjustments (including those of a normal, recurring nature) considered necessary to fairly present our unaudited Condensed Consolidated Balance Sheet and our unaudited Condensed Consolidated Statement of Stockholders’ Deficit, each as of June 30, 2023, as well as our unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss and Condensed Consolidated Statements of Cash Flows for all periods presented. You
should read our unaudited condensed consolidated interim financial statements and footnotes in conjunction with our consolidated financial statements and footnotes included within the Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).
Consolidation
We include all of our subsidiaries in our condensed consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.
Use of Estimates
We prepare our consolidated financial statements in conformity with GAAP. While preparing our financial statements, we make estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and accompanying notes. Accordingly, actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, deferred cost of revenue, share-based compensation, deferred income taxes, and inventory reserve, among other items.
The impact of the COVID-19 pandemic continues to unfold. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.
Cash
Our cash consists of funds held in bank accounts.
We maintain cash balances in United States dollars (“USD”), British pounds (“GBP”), RMB and Hong Kong dollars (“HKD”). The following table, reported in USD, disaggregates our cash balances by currency denomination (in thousands):
June 30, 2023 | December 31, 2022 | ||||||||||
Cash denominated in: | |||||||||||
USD | $ | 79 | $ | 11 | |||||||
RMB | 122 | 19 | |||||||||
GBP | 5 | 17 | |||||||||
HKD | 2 | 5 | |||||||||
Total cash | $ | 208 | $ | 52 |
We maintain substantially all of our USD-denominated cash at a U.S. financial institution where the balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At times, however, our cash balances may exceed the FDIC-insured limit. As of June 30, 2023, we do not believe we have any significant concentrations of credit risk. Cash held by our non-U.S. subsidiaries is subject to foreign currency fluctuations against the USD, although such risk is somewhat mitigated because we transfer U.S. funds to China to fund local operations. If, however, the USD is devalued significantly against the RMB, our cost to further develop our business in China could exceed original estimates.
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price). When reporting the fair values of our financial instruments, we prioritize those fair value measurements into one of three levels based on the nature of the inputs, as follows:
Level 1: Valuations based on quoted prices in active markets for identical assets and liabilities;
Level 2: Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and observable market data for similar, but not identical instruments; and
Level 3: Valuations based on unobservable inputs, which are based upon the best available information when external market data is limited or unavailable.
The fair value hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. For some products or in certain market conditions, observable inputs may not be available.
We believe the reported carrying amounts for cash, marketable securities, receivables, prepaids and other current assets, accounts payable, accrued expense and other current liabilities, and short-term debt approximate their fair values because of the short-term nature of these financial instruments.
Foreign Currency Translation
We report all currency amounts in USD. Our overseas subsidiaries, however, maintain their books and records in their functional currencies, which are GBP in the United Kingdom (“U.K.”) and RMB in China.
In general, when consolidating our subsidiaries with non-USD functional currencies, we translate the amounts of assets and liabilities into USD using the exchange rate on the balance sheet date, and the amounts of revenue and expense are translated at the average exchange rate prevailing during the period. The gains and losses resulting from translation of financial statement amounts into USD are recorded as a separate component of accumulated other comprehensive loss within stockholders’ deficit.
We used the exchange rates in the following table to translate amounts denominated in non-USD currencies as of and for the periods noted:
2023 | 2022 | ||||||||||
Exchange rates at June 30th: | |||||||||||
GBP:USD | 1.266 | 1.215 | |||||||||
RMB:USD | 0.138 | 0.149 | |||||||||
HKD:USD | 0.128 | 0.127 | |||||||||
Average exchange rate during the six months ended June 30th: | |||||||||||
RMB:USD | 0.143 | 0.149 | |||||||||
GBP:USD | 1.252 | 1.232 |
Revenue Recognition
AI-Based Products
We generate revenue by developing AI-based products, including fully-integrated AI solutions which combine our proprietary technology with third-party hardware and software products to meet end-user specifications. Under one type of contract for our AI-based products, we provide a single, continuous service to clients who control the assets as we create them. Accordingly, we recognize the revenue over the period of time during which we provide the service. Under another type of contract, we have performance obligations to provide fully-integrated AI solutions to our customer and we recognize revenue at the point in time when each performance obligation is completed and delivered to, tested by and accepted by our customer.
We recognize revenue when we transfer control of the promised goods or services to our customers, and we recognize an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. If there is uncertainty related to the timing of collections from our customer, which may be the case if our customer is not the ultimate end user of our goods, we consider this to be uncertainty of the customer’s ability and intention to pay us when consideration is due. Accordingly, we recognize revenue only when we have transferred control of the goods or services and collectability of consideration from the customer is probable.
When customers pay us prior to when we satisfy our obligation to transfer control of promised goods or services, we record the amount that reflects the consideration to which we expect to be entitled as a contract liability until such time as we satisfy our performance obligation.
For contracts under which we have not yet completed the performance obligation, deferred costs are recorded for any amounts incurred in advance of the performance obligation.
For our contracts with customers, we generally extend short-term credit policies to our customers, typically up to one year for large-scale projects.
We record the incremental costs of obtaining contracts as an expense when incurred.
We offer extended warranties on our products for periods of to three years. Revenue from these extended warranties is recognized on a straight-line basis over the warranty contract term.
Other
We generate revenue from other sources, such as from advertising and marketing services. We recognize the revenue from these contracts at the point in time when we transfer control of the good sold to the customer or when we deliver the promised promotional materials or media content. Substantially all of our contracts with customers that generate Other revenue are completed within one year or less.
Inventory
We use the first-in first-out method to determine the cost of our inventory, then we report inventory at the lower of cost or net realizable value. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated sales forecasts. At June 30, 2023 and December 31, 2022, reserve for inventory was $2.2 million and $2.2 million, respectively.
Refundable Tax Credits
We charge the cost of our research and development efforts to operations as incurred. Our subsidiary in the United Kingdom is entitled to receive certain government assistance in the form of refundable research and development tax credits from taxation authorities, based on qualifying expenditures incurred during the fiscal year. The refundable credits are not dependent on our ongoing tax status or tax position and accordingly are not considered part of income taxes. We record refundable tax credits as a reduction of technology and development expense when we can reasonably estimate the amount and it is more likely than not that such amount will be received. During the six months ended June 30, 2023, we recorded a tax credit of approximately $0.5 million.
Internal Use Software
We acquire or develop applications and other software that help us meet our internal needs with respect to operating our business. For such projects, planning cost and other costs related to the preliminary project stage, as well as costs incurred for post-implementation activities, are expensed as incurred. We capitalize costs incurred during the application development phase only when we believe it is probable the development will result in new or additional functionality. The types of costs capitalized during the application development phase include fees incurred with third parties for consulting, programming and other development activities performed to complete the software. We amortize our internal use software on a straight-line basis over an estimated useful life of three years. If we identify any internal use software to be abandoned, the cost less the accumulated amortization, if any, is recorded as amortization expense. Once we have fully amortized internal use software costs that we capitalized, we remove such amounts from their respective accounts.
Net Income (Loss) per Share
We calculate basic net income (loss) per share using the weighted-average number of common stock shares outstanding during the period. For the calculation of diluted net income (loss) per share, we give effect to all the shares of common stock that were outstanding during the period plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is anti-dilutive. Dilutive potential shares of common stock consist of incremental shares of common stock issuable upon exercise of stock options and warrants.
For the three and six months ended June 30, 2023 and 2022, there were no reconciling items related to either the numerator or denominator of the loss per share calculation, as their effect would have been anti-dilutive.
Securities which may have affected the calculation of diluted earnings per share for the three and six months ended June 30, 2023 if their effect had been dilutive include 1,623,346 total outstanding stock options, 1,011,441 outstanding warrants to purchase common stock, as well as an estimated 5,711,148 issuable to Ionic Ventures, LLC (“Ionic”) in relation to our transactions with Ionic (see Note 11).
Segments
Existing GAAP, which establishes a management approach to segment reporting, defines operating segments as components of an entity about which separate, discrete financial information is available for evaluation by the chief operating decision maker. We have identified our Chief Executive Officer as our chief operating decision maker, who reviews operating results to make decisions about allocating resources and assessing performance based upon only one operating segment.
Recently Issued Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06 (“ASU 2020-06”), Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The ASU also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. With regard to our financial reporting, ASU 2020-06 will be effective January 1, 2024, and early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. We are currently evaluating what effect(s) the adoption of ASU 2020-06 may have on our consolidated financial statements, but we do not believe the impact of the ASU will be material to our financial position, results of operations and cash flows. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.
We have reviewed all accounting pronouncements recently issued by the FASB and the SEC. The authoritative pronouncements that we have already adopted did not have a material effect on our financial condition, results of operations, cash flows or reporting thereof, and except as otherwise noted above, we do not believe that any of the authoritative pronouncements that we have not yet adopted will have a material effect upon our financial condition, results of operations, cash flows or reporting thereof.
NOTE 3. CONCENTRATION OF RISK
Revenue and Accounts Receivable
The disaggregation of revenue tables in Note 4 demonstrate the concentration in our revenue from certain products and the geographic concentration of our business. We also have a concentration in the volume of business we transacted with customers, as during the six months ended June 30, 2023, three of our customers represented about 40%, 35% and 11% of our revenue, respectively, while during six months ended June 30, 2022, two customers represented about 51% and 32%, respectively, of our revenue. At June 30, 2023, accounts receivable from four of our customers represented about 15%, 13%, 12% and 10%, respectively, of our gross accounts receivable, while at December 31, 2022, accounts receivable from our three largest customers represented about 23%, 16% and 10%, respectively, of our gross accounts receivable.
Deferred Cost of Revenue
Cost of Sales and Accounts Payable
The various hardware we purchase to fulfill our contracts with customers is not especially unique in nature. Based on our analysis, we believe that should any disruption in our current supply chain occur, a sufficient number of alternative vendors is available to us, at reasonably comparable specifications and price, such that we would not experience a material negative impact on our ability to procure the hardware we need to operate our business.
NOTE 4. REVENUE
We primarily sell AI-based products and services based upon computer vision and other technologies.
We do not include disclosures related to remaining performance obligations because substantially all our contracts with customers have an original expected duration of one year or less or, with regard to our stand-ready obligations, the amounts involved are not material.
Disaggregation of Revenue
The following table presents a disaggregation of our revenue by category of products and services (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
$ | 3,105 | $ | 2,472 | $ | 3,826 | $ | 7,018 | ||||||||||||||||
Other | 62 | 86 | 167 | 207 | |||||||||||||||||||
Revenue | $ | 3,167 | $ | 2,558 | $ | 3,993 | $ | 7,225 |
The following table presents a disaggregation of our revenue by country (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
China | $ | 3,097 | $ | 2,472 | $ | 3,840 | $ | 7,018 | |||||||||||||||
United States | 70 | 86 | 153 | 207 | |||||||||||||||||||
Revenue | $ | 3,167 | $ | 2,558 | $ | 3,993 | $ | 7,225 |
Significant Judgments
When accounting for revenue we make certain judgments, such as whether we act as a principal or as an agent in transactions or whether our contracts with customers fall within the scope of current GAAP regarding revenue, that affect the determination of the amount and timing of our revenue from contracts with customers. Based on the current facts and circumstances related to our contracts with customers, none of the judgments we make involve an elevated degree of qualitative significance or complexity such that further disclosure is warranted in terms of their potential impact on the amount and timing of our revenue.
Contract Assets and Contract Liabilities
We do not currently generate material contract assets. During the six months ended June 30, 2023, our contract liability changed only as a result of routine business activity.
During the six months ended June 30, 2023 and 2022, the amount of revenue we recognized that was included in the beginning balance of Contract liability was not material.
During the six months ended June 30, 2023 and 2022, we did not recognize revenue from performance obligations that were satisfied in previous periods.
NOTE 5. TRADE ACCOUNTS RECEIVABLE
June 30, 2023 | December 31, 2022 | ||||||||||
Gross accounts receivable balance | $ | 7,526 | $ | 7,213 | |||||||
Allowance for bad debt | (4,081) | (4,122) | |||||||||
Accounts receivable, net | $ | 3,445 | $ | 3,091 |
Generally, it is not unusual for Chinese entities to pay their vendors on longer timelines than the timelines typically observed in U.S. commerce. Trade receivables related to our China AI projects at June 30, 2023 and December 31, 2022; including approximately $0.7 million and $1.1 million, respectively, of trade receivables from projects related to work with our China Business Partner (see Note 15 for more information regarding our China Business Partner and related accounting); represented essentially all our gross trade receivables in each such period. Despite the longer collection timelines normally observed with Chinese entities, we have noted that the COVID-19 related lockdowns that persisted in China for most of 2022 have caused further delay in our ability to collect all balances due from some of our customers in China. As a result of our inability to assure collection of all amounts due from such customers within a short period of time, we recorded a reserve for bad debt of approximately $2.8 million as of December 31, 2022 for all accounts receivable from China customers that were more than one year past due. The additional reserve for bad debt we recorded during 2023 was not material.
NOTE 6. DEFERRED COST OF REVENUE
Deferred cost of revenue as of June 30, 2023 and December 31, 2022 of $5.6 million and $7.5 million, respectively, represent amounts we have paid in advance to vendors who provide services to us in relation to various projects in China. Specifically, the deferred cost of revenue balance as of June 30, 2023, a large percentage of which was related to project installations we expected would be provided to us through our China Business Partner (described in more detail in Note 15), was paid almost entirely to a single vendor which will be visiting numerous sites across various regions of China to install our software solutions and/or hardware for our customers and perform other services for us pursuant to our customers’ requirements. Because most of the projects for which we have engaged the vendor require purchases of hardware, equipment and/or supplies in advance of site visits, we made the prepayments during 2022 in anticipation of several large batches of project installations. However, the lengthy COVID-19 related lockdowns that occurred in various regions in China prevented us and the vendor from being able to complete as many projects as we originally expected and caused our customers to delay installations. Given that the delays were related to the COVID-19 lockdowns that had ended by December 31, 2022 and were not a result of the vendor’s inability to either perform the services or refund of the amounts we advanced, we believe the balance as of June 30, 2023 will be fully recovered. We did not make any additional payments in 2023 to the vendor assisting us with installations related to projects provided to us through our China Business Partner, and we were able to complete installations that reduced the deferred cost of revenue balance associated with that vendor which caused the net decrease in deferred cost of revenue.
NOTE 7. PREPAID EXPENSE AND OTHER CURRENT ASSETS
The following table presents the components of prepaid expense and other current assets (in thousands):
June 30, 2023 | December 31, 2022 | ||||||||||
Other receivables | 10 | 23 | |||||||||
Prepaid expense | 602 | 1,144 | |||||||||
Deposits | 245 | 201 | |||||||||
Other current assets | 7 | 6 | |||||||||
Total | $ | 864 | $ | 1,374 | |||||||
During the three months ended June 30, 2023, we recorded an impairment of approximately $0.2 million related to certain prepaid expense amounts which were deemed unrecoverable.
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands, except estimated lives):
Estimated Life (Years) | June 30, 2023 | December 31, 2022 | |||||||||||||||
Vehicles | 3 | $ | 153 | 153 | |||||||||||||
Computers and equipment | 3 | 1,170 | $ | 1,170 | |||||||||||||
Furniture and fixtures | 3 | 42 | 42 | ||||||||||||||
Software | 3 | 5,064 | 5,160 | ||||||||||||||
Leasehold improvements | 3 | 206 | 204 | ||||||||||||||
Software development in progress | 997 | 1,199 | |||||||||||||||
Total property, equipment and software | $ | 7,632 | $ | 7,928 | |||||||||||||
Less accumulated depreciation | (6,210) | (6,229) | |||||||||||||||
Total property, equipment and software, net | $ | 1,422 | $ | 1,699 |
For the six months ended June 30, 2023 and 2022, depreciation (and amortization of software) expense was de minimis.
During the three months ended June 30, 2023, we determined that certain costs that we had capitalized to software development in progress would no longer be recoverable and we recorded an impairment of approximately $0.2 million.
NOTE 9. ACCRUED EXPENSE AND OTHER CURRENT LIABILITIES
The following table presents the components of Accrued expense and other current liabilities (in thousands):
June 30, 2023 | December 31, 2022 | ||||||||||
Accrued compensation and benefit-related expense | $ | 2,542 | $ | 1,448 | |||||||
Accrued interest | 279 | 769 | |||||||||
Other accrued expense | 2,750 | 2,393 | |||||||||
Other payables | 2,031 | 2,234 | |||||||||
Operating lease liability - current | 409 | 138 | |||||||||
29 | 32 | ||||||||||
Other current liabilities | 149 | 208 | |||||||||
Total | $ | 8,189 | $ | 7,222 | |||||||
NOTE 10. NOTES PAYABLE (IN DEFAULT)
The following table presents our notes payable (in thousands) as of:
June 30, 2023 | December 31, 2022 | ||||||||||
Principal balance of New Mudrick Notes (June 30, 2023) and Original Mudrick Loans (December 31, 2022) | $ | 16,307 | $ | 14,418 | |||||||
Other notes payable | 173 | 189 | |||||||||
Notes payable, net of unamortized discount and debt issuance cost | $ | 16,480 | $ | 14,607 | |||||||
On December 3, 2021, we entered into senior secured loan agreements (the “Original Mudrick Loan Agreements”) with certain of our subsidiaries as guarantors (the “Guarantors”) and certain institutional lenders affiliated with Mudrick Capital Management, LP (collectively, “Mudrick”), pursuant to which Mudrick extended credit to us consisting of term loans in the aggregate principal amount of $30.0 million (the “Original Mudrick Loans”). The Original Mudrick Loans bore interest at 16.5% per annum until the original maturity date of July 31, 2022 and, following an amendment we entered into with Mudrick in August 2022, bore interest at 18.5% per annum. The amendment also extended the maturity date of the Original Mudrick Loans from July 31, 2022 to October 31, 2022. However, we did not make the required repayment of the Original Mudrick Loans by October 31, 2022, which constituted an event of default under the Original Mudrick Loans and triggered an increase in the interest rate under the Original Mudrick Loans to 20.5%.
In connection with our entry into the Original Mudrick Loan Agreements, we paid Mudrick an upfront fee equal to 5.0% of the amount of the Original Mudrick Loans, which amount was netted against the drawdown of the Original Mudrick Loans. We recorded the upfront fee as a debt discount of $1.5 million, and recorded debt issuance cost totaling $1.1 million. We amortized the discount on the Original Mudrick Loans and the debt issuance cost over the life of the Original Mudrick Loans and, during the year ended December 31, 2022, we amortized $2.2 million of such discount and debt issuance cost.
During the year ended December 31, 2022, we repaid $6.2 million of the principal amount of the Original Mudrick Loans in cash and delivered all of our shares in Sharecare, Inc. to Mudrick on July 11, 2022, in partial settlement of the Original Mudrick Loans, resulting in a further repayment of approximately $9.7 million of the principal amount of the Original Mudrick Loans. As of December 31, 2022, the outstanding balance of the Original Mudrick Loans was $14.4 million, and approximately $0.8 million of accrued interest was included in Accrued expense and other current liabilities. During the three months ended March 31, 2023, we accrued approximately $0.6 million additional interest expense on the Original Mudrick Loans, of which $0.3 million was paid during the period.
On March 14, 2023, we entered into a Note Purchase Agreement (the “New Mudrick Loan Agreement”) with Mudrick, pursuant to which all of the Original Mudrick Loans were cancelled in exchange for new notes payable to Mudrick (the “New Mudrick Notes”) in the aggregate principal amount of approximately $16.3 million. The principal balance of the New Mudrick Notes included the $14.4 million outstanding balance of the Original Mudrick Loans, plus $1.1 million of accrued interest on the Original Mudrick Loans, plus a fee of approximately $0.8 million payable to Mudrick as consideration for cancelling the Original Mudrick Loans and converting all amounts outstanding thereunder into the New Mudrick Notes. We recorded the $0.8 million as interest expense during the three months ended March 31, 2023.
The New Mudrick Notes bear interest at a rate of 20.5% per annum, which shall be payable on the last business day of each month commencing on May 31, 2023. The interest rate will increase by 2% and the principal amount outstanding under the New Mudrick Notes and any unpaid interest thereon may become immediately due and payable upon the occurrence of any event of default under the New Mudrick Loan Agreement. All amounts outstanding under the New Mudrick Notes, including all accrued and unpaid interest, will be due and payable in full on October 31, 2023.
To secure the payment and performance of the obligations under the Original Mudrick Loan Agreements and the New Mudrick Loan Agreement, we, together with certain of our subsidiaries (the “Guarantors”), have granted to TMI Trust Company, as the collateral agent for the benefit of Mudrick, a first priority lien on, and security interest in, all assets of Remark and the Guarantors, subject to certain customary exceptions.
We did not make a required repayment of the outstanding loans under the New Mudrick Loan Agreement by June 30, 2023, which constitutes an event of default for which we have not received a waiver as of the date of this Form 10-Q. While we are actively engaged in discussions with Mudrick regarding a resolution of the event of default, we cannot provide any assurance that we will be successful in obtaining a waiver or that Mudrick will continue to forebear from taking any enforcement actions against us.
Other Notes Payable
The Other notes payable in the table above represent individually immaterial notes payable issued for the purchase of operating assets. Such notes payable bear interest at a weighted-average interest rate of approximately 6.2% and have a weighted-average remaining term of approximately 4.5 years.
NOTE 11. TRANSACTIONS WITH IONIC
Convertible Debentures
On October 6, 2022, we entered into a debenture purchase agreement (the “2022 Debenture Purchase Agreement”) and a purchase agreement (the “ELOC Purchase Agreement”) with Ionic. Pursuant to the 2022 Debenture Purchase Agreement, we issued a convertible subordinated debenture in the original principal amount of approximately $2.8 million (the “2022 Debenture”) to Ionic for a purchase price of $2.5 million. The 2022 Debenture automatically converted into shares of our common stock (the “2022 Debenture Settlement Shares”) on November 17, 2022 upon the effectiveness of a registration statement we filed pursuant to a registration rights agreement we entered into with Ionic. Upon issuance of the 2022 Debenture, we initially estimated the obligation to issue common stock at approximately $3.6 million. As of December 31, 2022, we estimated such obligation to have a fair value of $1.9 million, representing an additional 1,720,349 shares to be issued pursuant to the 2022 Debenture. When the measurement period for determining the conversion price of the 2022 Debenture was completed, we determined that the final number of 2022 Debenture Settlement Shares would be 3,129,668. As of June 30, 2023, we have issued all such 2022 Debenture Settlement Shares (inclusive of 898,854 shares that were issued during 2022).
On March 14, 2023, we entered into a new debenture purchase agreement (the “2023 Debenture Purchase Agreement”) with Ionic pursuant to which we authorized the issuance and sale of two convertible subordinated debentures in the aggregate principal amount of approximately $2.8 million for an aggregate purchase price of $2.5 million. The first debenture is in the original principal amount of approximately $1.7 million for a purchase price of $1.5 million (the “First 2023 Debenture”), which was issued on March 14, 2023, and the second debenture is in the original principal amount of approximately $1.1 million for a purchase price of $1.0 million (the “Second 2023 Debenture” and collectively with the First Debenture, the “2023 Debentures”), which was issued on April 12, 2023. Upon issuance of the First 2023 Debenture and the Second 2023 Debenture, we initially estimated the obligations to issue common stock at approximately $2.5 million and $1.7 million, respectively. As of June 30, 2023, we estimated that an aggregate total of 4,432,980 shares would be issued upon conversion of the 2023 Debentures, representing obligations with an aggregate fair value of $4.3 million.
The 2023 Debentures accrue interest at a rate of 10% per annum, of which two years of interest is guaranteed and deemed earned in full on the first day following the issuance date. The interest rate on the 2023 Debentures increases to a rate of 15% per annum if the 2023 Debentures are not fully paid, converted or redeemed by the second anniversary of each debenture (each, a “Maturity Date”) or upon the occurrence of certain trigger events, including, but not limited to, the suspension from trading or the delisting of our common stock from Nasdaq for three consecutive trading days. If the 2023 Debentures are not fully paid or converted by their respective Maturity Dates, the original aggregate principal amount of the 2023 Debentures will be deemed to have been approximately $3.3 million from their issuance dates.
The 2023 Debentures automatically convert into shares of common stock at the earlier of (i) the effectiveness of the initial registration statement registering the resale of certain Registrable Securities as such term is defined in the Registration Rights Agreement (as defined below) including, without limitation, the shares issuable upon conversion of the 2023 Debentures (the “Conversion Shares”) (such registration statement, the “Resale Registration Statement”), and (ii) 181 days after the issuance date of each 2023 Debenture. The number of shares of common stock issuable upon conversion of each 2023 Debenture shall be determined by dividing the outstanding balance under each 2023 Debenture (including all accrued and unpaid interest and accrued and unpaid late charges, if any) by a conversion price that is the lower of (x) 80% (or 70% if our common stock is not then trading on Nasdaq) of the average of the two lowest VWAPs over a specified measurement period following the conversion date (the “Variable Conversion Price”), and (y) $1.40 (the “Fixed Conversion Price”), subject to full ratchet anti-dilution protection in the event we issue certain equity securities at a price below the then Fixed Conversion Price. The 2023 Debentures are unsecured and expressly junior to any of our existing or future debt obligations. Notwithstanding anything to the contrary, under no circumstances shall the Variable Conversion Price be less than the floor price of $0.20 as specified in the
2023 Debentures. Additionally, in the event of a bankruptcy, we are required to redeem the 2023 Debentures in cash in an amount equal to the then outstanding balance of the 2023 Debentures multiplied by 120%. The 2023 Debentures further provide that we will not effect the conversion of any portion of the 2023 Debentures, and the holder thereof will not have the right to a conversion of any portion of the 2023 Debentures, to the extent that after giving effect to such conversion, the holder together with its affiliates would beneficially own more than 4.99% of the outstanding shares of our common stock immediately after giving effect to such conversion. Furthermore, we may not issue shares of common stock underlying the 2023 Debentures if such issuance would require us to obtain stockholder approval under the Nasdaq rules or until such stockholder approval has been obtained.
Concurrently with entering into the 2023 Debenture Purchase Agreement, we also entered into a registration rights agreement with Ionic (the “2023 Registration Rights Agreement”), in which we agreed to file with the SEC one or more registration statements, as necessary, and to the extent permissible and subject to certain exceptions, to register under the Securities Act of 1933, as amended, the resale of the shares of our common stock issuable upon conversion of the 2023 Debentures and the shares of common stock that may be issued to Ionic if we fail to comply with our obligations in the 2023 Registration Rights Agreement. The 2023 Registration Rights Agreement required that we file, within 15 calendar days after we filed our 2022 Form 10-K, a resale registration statement and use commercially reasonable efforts to have such resale registration statement declared effective by the SEC on or before the earlier of (i) 90 days after signing of the 2023 Registration Rights Agreement (or 120 days if such registration statement was subject to full review by the SEC) and (ii) the 2nd business day after we were notified we would not be subject to further SEC review. If we failed to file or have the resale registration statement declared effective by the specified deadlines, then in each instance, we would be required to issue to Ionic 150,000 shares of our common stock within trading days after such failure, and with respect to the Conversion Shares, we would additionally pay in cash, as liquidated damages, an amount equal to 2% of the amount then currently outstanding under the 2023 Debentures for failure to file and have the Resale Registration Statement declared effective by the same deadlines set forth above for each 30-day period after each such failure. The Resale Registration Statement was filed on June 16, 2023 and declared effective on June 26, 2023. Because we did not meet the filing and effectiveness deadlines specified in the agreement, as of June 30, 2023, we had an obligation to issue 300,000 of our common stock shares to Ionic, representing a liability of approximately $0.3 million.
Equity Line of Credit
The ELOC Purchase Agreement, as amended (see below), provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Ionic to purchase up to an aggregate of $50.0 million of shares of our common stock over the 36-month term of the ELOC Purchase Agreement. Under the ELOC Purchase Agreement, after the satisfaction of certain commencement conditions, including, without limitation, the effectiveness of a resale registration statement filed with the SEC registering such shares and that the 2022 Debenture shall have been fully converted into shares of common stock or shall otherwise have been fully redeemed and settled in all respects in accordance with the terms of the 2022 Debenture, we have the right to present Ionic with a purchase notice (each, a “Purchase Notice”) directing Ionic to purchase any amount up to $3.0 million of our common stock per trading day, at a per share price equal to 90% (or 80% if our common stock is not then trading on Nasdaq) of the average of the two lowest volume-weighted average prices (“VWAPs”) over a specified measurement period. With each purchase under the ELOC Purchase Agreement, we are required to deliver to Ionic an additional number of shares equal to 2.5% of the number of shares of common stock deliverable upon such purchase. The number of shares that we can issue to Ionic from time to time under the ELOC Purchase Agreement shall be subject to the condition that we will not sell shares to Ionic to the extent that Ionic, together with its affiliates, would beneficially own more than 4.99% of the outstanding shares of our common stock immediately after giving effect to such sale (the “Beneficial Ownership Limitation”).
In addition, Ionic will not be required to buy any shares of our common stock pursuant to a Purchase Notice on any trading day on which the closing trade price of our common stock is below $0.20 (as amended by the Letter Agreement, as defined below). We will control the timing and amount of sales of our common stock to Ionic. Ionic has no right to require any sales by us, and is obligated to make purchases from us as directed solely by us in accordance with the ELOC Purchase Agreement. The ELOC Purchase Agreement provides that we will not be required or permitted to issue, and Ionic will not be required to purchase, any shares under the ELOC Purchase Agreement if such issuance would violate Nasdaq rules, and we may, in our sole discretion, determine whether to obtain stockholder approval to issue shares in excess of 19.99% of our outstanding shares of common stock if such issuance would require stockholder approval under Nasdaq rules. Ionic has agreed that neither it nor any of its agents, representatives and affiliates will engage in any direct or indirect short-selling or hedging our common stock during any time prior to the termination of the ELOC Purchase Agreement.
The ELOC Purchase Agreement may be terminated by us at any time after commencement, at our discretion; provided, however, that if we sold less than $25.0 million to Ionic (other than as a result of our inability to sell shares to Ionic as a result of the Beneficial Ownership Limitation, our failure to have sufficient shares authorized or our failure to obtain stockholder
approval to issue more than 19.99% of our outstanding shares), we will pay to Ionic a termination fee of $0.5 million, which is payable, at our option, in cash or in shares of common stock at a price equal to the closing price on the day immediately preceding the date of receipt of the termination notice. Further, the ELOC Purchase Agreement will automatically terminate on the date that we sell, and Ionic purchases, the full $50.0 million amount under the agreement or, if the full amount has not been purchased, on the expiration of the 36-month term of the ELOC Purchase Agreement.
On January 5, 2023, we and Ionic entered into a letter agreement (the “Letter Agreement”) which amended the ELOC Purchase Agreement. Under the Letter Agreement, the parties agreed, among other things, to (i) amend the floor price below which Ionic will not be required to buy any shares of our common stock under the ELOC Purchase Agreement from $0.25 to $0.20, determined on a post-reverse split basis, (ii) amend the per share purchase price for purchases under the ELOC Purchase Agreement to 90% of the average of the two lowest daily VWAPs over a specified measurement period, which will commence at the conclusion of the applicable measurement period related to the 2022 Debenture and (iii) waive certain requirements in the ELOC Purchase Agreement to allow for a one-time $0.5 million purchase under the ELOC Purchase Agreement.
As partial consideration for the waiver to allow for the $0.5 million purchase by Ionic, we agreed to issue to Ionic that number of shares (the “Letter Agreement Shares”) equal to the difference between (x) the variable conversion price in the 2022 Debenture, and (y) the calculation achieved as a result of the following formula: 80% (or 70% if our common stock is not then trading on Nasdaq) of the lowest VWAP starting on the trading day immediately following the receipt of pre-settlement conversion shares following the date on which the 2022 Debenture automatically converts or other relevant date of determination and ending the later of (a) 10 consecutive trading days after (and not including) the Automatic Conversion Date (as defined in the ELOC Agreement) or such other relevant date of determination and (b) the trading day immediately after shares of our common stock in the aggregate amount of at least $13.9 million shall have traded on Nasdaq. As of March 31, 2023, we estimated the obligation to issue the Letter Agreement Shares at approximately $0.2 million. As of June 30, 2023, we had issued all the 200,715 the Letter Agreement Shares.
In January 2023 and June 2023, Ionic advanced to us $1.0 million (the “January ELOC Advance”) and $2.0 million (the “June ELOC Advance” and, along with the January ELOC Advance, the “ELOC Advances”) pursuant to the ELOC Agreement, as amended. As of March 31, 2023, we estimated the obligation to issue our common stock to Ionic related to the January ELOC Advance at approximately $1.5 million. As of June 30, 2023, we had issued all the shares of our common stock related to the January ELOC Advance, but we were still obligated to issue an estimated 978,168 shares of our common stock related to the June ELOC Advance, representing an obligation with a fair value of approximately $1.0 million.
Accounting for the Debentures and the ELOC
Using the guidance in ASC Topic 480, Distinguishing Liabilities from Equity, we evaluated the 2022 Debenture Purchase Agreement and its associated 2022 Debenture, the 2023 Debenture Purchase Agreement and its associated First 2023 Debenture, and the ELOC Purchase Agreement and its associated Letter Agreement and ELOC Advance, and determined that all represented obligations that must or may be settled with a variable number of shares, the monetary value of which was based solely or predominantly on a fixed monetary amount known at inception. Using a Level 3 input, we estimated the number of shares of our common stock that we would have to issue for each obligation and multiplied the estimated number of shares by the closing market price of our common stock on the measurement date to determine the fair value of the obligation. We then recorded the amount of the initial obligation in excess of the purchase price as finance cost. We remeasure each obligation at every balance sheet date until all shares representing the obligation have been issued, with the change in the amount of the obligation being recorded as finance cost. The following table shows the changes in our obligations to issue common stock (dollars in thousands):
2022 Debenture | 2023 Debentures | Filing & Effectiveness Default | Letter Agreement | ELOC Advances | Total | ||||||||||||||||||||||||||||||
Obligations to Issue Common Stock | |||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | $ | 1,892 | $ | — | $ | — | $ | — | $ | — | $ | 1,892 | |||||||||||||||||||||||
Establishment of new obligation to issue shares | — | 4,109 | 332 | 249 | 3,984 | 8,674 | |||||||||||||||||||||||||||||
Issuance of Shares | (3,138) | — | — | (227) | (3,056) | (6,421) | |||||||||||||||||||||||||||||
Change in measurement of liability | 1,246 | 235 | (38) | (22) | 31 | 1,452 | |||||||||||||||||||||||||||||
Balance at June 30, 2023 | $ | — | $ | 4,344 | $ | 294 | $ | — | $ | 959 | $ | 5,597 | |||||||||||||||||||||||
Estimated Number of Shares Issuable | |||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | 1,720,349 | — | — | — | — | 1,720,349 | |||||||||||||||||||||||||||||
Establishment of new obligation to issue shares | — | 3,669,228 | 300,000 | 200,715 | 3,143,607 | 7,313,550 | |||||||||||||||||||||||||||||
Issuance of Shares | (2,230,814) | — | — | (200,715) | (2,641,173) | (5,072,702) | |||||||||||||||||||||||||||||
Change in estimated number of shares issuable | 510,465 | 763,752 | — | — | 475,734 | 1,749,951 | |||||||||||||||||||||||||||||
Balance at June 30, 2023 | — | 4,432,980 | 300,000 | — | 978,168 | 5,711,148 |
The following table shows the composition of finance cost associated with our obligations to issue common stock (dollars in thousands):
2022 Debenture | 2023 Debentures | Filing & Effectiveness Default | Letter Agreement | ELOC Advances | Total | ||||||||||||||||||||||||||||||
Initial obligation in excess of purchase price | $ | — | $ | 1,609 | $ | 332 | $ | 249 | $ | 984 | $ | 3,174 | |||||||||||||||||||||||
Change in measurement of liability | 1,246 | 235 | (38) | (22) | 31 | 1,452 | |||||||||||||||||||||||||||||
Total | $ | 1,246 | $ | 1,844 | $ | 294 | $ | 227 | $ | 1,015 | $ | 4,626 |
NOTE 12. COMMITMENTS AND CONTINGENCIES
At June 30, 2023, we had no material commitments outside the normal course of business.
Contingencies
As of June 30, 2023, we were neither a defendant in any material pending legal proceeding nor are we aware of any material threatened claims against us and, therefore, we have not accrued any contingent liabilities.
Registration Rights Agreement
On September 27, 2021, we entered into a securities purchase agreement (the “Armistice Purchase Agreement”) with Armistice Capital Master Fund Ltd. (“Armistice Capital”) pursuant to which we issued shares of our common stock together with warrants to purchase our common stock, subject to certain customary anti-dilution adjustments (the “Armistice Warrants”).
In connection with our entry into the Armistice Purchase Agreement, we also entered into a registration rights agreement with Armistice Capital, pursuant to which we were obligated to file one or more registration statements, as necessary, to register under the Securities Act of 1933, as amended, the resale of the shares we issued to Armistice Capital and the shares underlying the Armistice Warrants (collectively, the “Armistice Registrable Securities”) and to obtain effectiveness of such registration statement no later than 90 days following September 27, 2021. The registration rights agreement provided that if we failed to
satisfy our obligation to timely obtain effectiveness, we would incur a penalty of as much as $1.0 million. The registration statement to register the resale of the Armistice Registrable Securities was declared effective on October 31, 2022. We had accrued the maximum penalty and, as of December 31, 2022, paid $0.2 million of such amount, resulting in an unpaid amount of $0.8 million included in other accrued expense as of June 30, 2023.
NOTE 13. STOCKHOLDERS' EQUITY (DEFICIT)
Warrants
The following table summarizes information related to our equity-classified stock warrant issuances as of and for the dates and periods noted:
Shares | Weighted Average Exercise Price Per Share | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
Outstanding at December 31, 2022 | 1,011,441 | $ | 40.10 | 3.7 | $ | — | |||||||||||||||||
Granted | — | — | |||||||||||||||||||||
Exercised | — | — | |||||||||||||||||||||
Forfeited, cancelled or expired | — | — | |||||||||||||||||||||
Outstanding at June 30, 2023 | 1,011,441 | $ | 40.10 | 3.2 | $ | — |
Share-Based Compensation
We are authorized to issue equity-based awards under our 2014 Incentive Plan, our 2017 Incentive Plan and our 2022 Incentive Plan, each of which our stockholders have approved. We also award cash bonuses (“China Cash Bonuses”) to our employees in China, which grants are not subject to a formal incentive plan and which can only be settled in cash. We grant such awards to attract, retain and motivate eligible officers, directors, employees and consultants. Under each of the plans, we have granted shares of restricted stock and options to purchase common stock to our officers and employees with exercise prices equal to or greater than the fair value of the underlying shares on the grant date.
Stock options and China Cash Bonuses generally expire 10 years from the grant date. All forms of equity awards and China Cash Bonuses vest upon the passage of time, the attainment of performance criteria, or both. When participants exercise stock options, we issue any shares of our common stock resulting from such exercise from new authorized and unallocated shares available at the time of exercise.
The following table summarizes activity under our equity incentive plans related to equity-classified stock option grants as of and for the dates and periods noted:
Shares | Weighted Average Exercise Price Per Share | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
Outstanding at December 31, 2022 | 1,626,631 | $ | 30.31 | 5.5 | $ | 1 | |||||||||||||||||
Granted | — | — | |||||||||||||||||||||
Exercised | — | — | |||||||||||||||||||||
Forfeited, cancelled or expired | (3,285) | 12.50 | |||||||||||||||||||||
Outstanding at June 30, 2023 | 1,623,346 | $ | 46.75 | 5.0 | $ | — | |||||||||||||||||
Exercisable at December 31, 2022 | 1,549,681 | 31.41 | 5.3 | $ | 1 | ||||||||||||||||||
Exercisable at June 30, 2023 | 1,594,299 | 30.79 | 4.9 | $ | — |
The following table summarizes activity related to our liability-classified China Cash Bonuses as of and for the dates and periods noted:
Shares | Weighted Average Exercise Price Per Share | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
Outstanding at December 31, 2022 | 71,450 | $ | 35.99 | 6.1 | $ | — | |||||||||||||||||
Granted | — | — | |||||||||||||||||||||
Exercised | — | — | |||||||||||||||||||||
Forfeited, cancelled or expired | — | — | |||||||||||||||||||||
Outstanding at June 30, 2023 | 71,450 | $ | 35.99 | 5.7 | $ | — | |||||||||||||||||
Exercisable at December 31, 2022 | 68,450 | 36.97 | 6.1 | $ | — | ||||||||||||||||||
Exercisable at June 30, 2023 | 71,450 | 35.99 | 5.7 | $ | — |
The following table presents the change in the liability associated with our China Cash Bonuses included in Accrued expense and other current liabilities (in thousands):
Six Months Ended June 30, | Year Ended December 31, | ||||||||||
2023 | 2022 | ||||||||||
Balance at beginning of period | $ | 32 | $ | 439 | |||||||
Share-based compensation expense related to China Cash Bonuses | (3) | (407) | |||||||||
Balance at end of period | $ | 29 | $ | 32 |
The following table presents a breakdown of share-based compensation cost included in operating expense (in thousands):
Six Months Ended June 30, | |||||||||||
2023 | 2022 | ||||||||||
Stock options | $ | 156 | $ | 1,024 | |||||||
China Cash Bonuses | (3) | (265) | |||||||||
Total | $ | 153 | $ | 759 |
We record share-based compensation expense in the books of the subsidiary that incurs the expense, while for equity-classified stock options we record the change in additional paid-in capital on the corporate entity because the corporate entity’s equity underlies such stock options.
The following table presents information regarding unrecognized share-based compensation cost associated with stock options and China Cash Bonuses:
June 30, 2023 | |||||
Unrecognized share-based compensation cost for non-vested awards (in thousands): | |||||
Stock options | 42 | ||||
China Cash Bonuses | — | ||||
Weighted-average years over which unrecognized share-based compensation expense will be recognized: | |||||
Stock options | 1.6 | ||||
China Cash Bonuses | 0 |
NOTE 14. RELATED PARTY TRANSACTIONS
As of June 30, 2023, we owed approximately $1.1 million to members of management representing various operating expense payments made on our behalf.
NOTE 15. CHINA BUSINESS PARTNER
We interact with an unrelated entity (the “China Business Partner”) in more than one capacity. Firstly, since 2020, we have been working with the China Business Partner to earn revenue by obtaining business from some of the largest companies in China. Secondly, our artificial intelligence business in the U.S. has purchased substantially all of its inventory from a subsidiary of the China Business Partner which manufactures certain equipment to our specifications; though, during the six months ended June 30, 2023, we did not make any such purchases. In addition, a member of our senior leadership team maintains a role in the senior management structure of the China Business Partner.
During the six months ended June 30, 2023 and 2022, we recognized approximately $0.1 million and $3.4 million, respectively, of revenue from the relationship with the China Business Partner. At June 30, 2023 and December 31, 2022, in addition to the outstanding accounts receivable balances from the China Business Partner described in Note 5, we had outstanding accounts payable to the China Business Partner of $0.7 million and $0.7 million, respectively.
NOTE 16. SUBSEQUENT EVENTS
Ionic Agreement Amendment
On July 12, 2023, we and Ionic entered into a letter agreement (the “July 2023 Letter Agreement”) which amends the Purchase Agreement, dated as of October 6, 2022, by and between Remark and Ionic, and as previously amended on January 5, 2023 (the “ELOC Purchase Agreement”).
Under the July 2023 Letter Agreement, the parties agreed, among other things, to (i) allow Remark to deliver one or more irrevocable written notices (“Exemption Purchase Notices”) to Ionic in a total aggregate amount not to exceed $20.0 million, which total aggregate amount shall be reduced by the aggregate amount of previous Exemption Purchase Notices, (ii) amend the per share purchase price for purchases under an Exemption Purchase Notice to 80% of the average of the two lowest daily volume-weighted average prices (“VWAPs”) over a specified measurement period, (iii) amend the definition of the specified measurement period to stipulate that, for purposes of calculating the final purchase price, such measurement period begins the trading day after Ionic pays Remark the amount requested in the purchase notice, while the calculation of the dollar volume of Remark common stock traded on the principal market to determine the length of the measurement period shall begin on the trading day after the previous measurement period ends, and iv) that any additional Exemption Purchase Notices that are not in accordance with the terms and provisions of the Purchase Agreement shall be subject to Ionic’s approval.
Ionic Transactions
On each of July 13, 2023 and August 10, 2023, Ionic advanced to us $1.5 million pursuant to the ELOC Agreement, as amended.
During July 2023, we issued 300,000 shares to Ionic in final settlement of our obligation to issue shares for the filing and effectiveness defaults related to the 2023 Registration Rights Agreement and 1,288,334 shares to Ionic in final settlement of our obligations related to the June ELOC Advance. Also during July 2023, we issued 97,000 shares to Ionic in partial settlement of our obligation to issue shares related to the 2023 Debentures.
Failure to Maintain Continued Listing Standards
On April 27, 2023, we received a written notice from the Nasdaq Listing Qualifications Department notifying us that, pursuant to Nasdaq Listing Rule 5550(b)(3), we are required to maintain a minimum of $500,000 in net income from continuing operations in the most recently completed fiscal year, or two of the last three fiscal years (the “Net Income Standard”). Since our 2022 Form 10-K reported net loss from continuing operations, and as of April 25, 2023, we did not meet the alternative continued listing standards (collectively, with the Net Income Standard, the “Continued Listing Standards”) under Nasdaq Listing Rule 5550(b) of a minimum stockholders' equity of $2.5 million or minimum market value of listed securities of $35 million, we no longer comply with the Continued Listing Standards.
In accordance with Nasdaq Listing Rule 5810(c)(2)(A), on June 12, 2023 we submitted a plan to regain compliance with the Continued Listing Standards to the Nasdaq Listing Qualifications Department. On July 24, 2023, the Nasdaq Listing Qualifications Department notified us that it was granting us until October 24, 2023 (the “Extension Period”) to file a report with the SEC and Nasdaq stating that we have successfully executed our plan to regain compliance with the Continued Listing Standards and that we did in fact regain such compliance. If we are not able to regain compliance with the Continued Listing Standards by October 24, 2023, or if we do regain such compliance but are subsequently unable to demonstrate compliance with the Continued Listing Standards in our annual report on Form 10-K for the year ended December 31, 2023, we may be subject to delisting.
Our common stock will continue to be listed and traded on Nasdaq during the Extension Period, subject to our compliance with the other continued listing requirements of Nasdaq.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read our discussion and analysis of our financial condition and results of operations for the three months ended June 30, 2023 in conjunction with our condensed consolidated financial statements and notes thereto set forth in Part I, Item 1 of this Form 10-Q. Such discussion and analysis includes forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. You should also read Business, Risk Factors and Special Note Regarding Forward-Looking Statements in this Form 10-Q.
OVERVIEW
We are a diversified global technology business with leading AI and data-analytics, as well as a portfolio of digital media properties.
OUR BUSINESS
Corporate Structure
We are a holding company incorporated in Delaware and not a Chinese operating company. As a holding company, we conduct most of our operations through our subsidiaries, each of which is wholly owned. Until September 2022, we had historically conducted a significant part of our operations through contractual arrangements between our WFOE and certain VIEs based in China to address challenges resulting from laws, policies and practices that may disfavor foreign-owned entities that operate within industries deemed sensitive by the Chinese government. We were the primary beneficiary of the VIEs because the contractual arrangements governing the relationship between the VIEs and our WFOE, which included an exclusive call option agreement, exclusive business cooperation agreement, a proxy agreement and an equity pledge agreement, enabled us to (i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive call option to purchase, at any time, all or part of the equity interests in and/or assets of the VIEs to the extent permitted by Chinese laws. Because we were the primary beneficiary of the VIEs, we consolidated the financial results of the VIEs in our consolidated financial statements in accordance with GAAP.
We terminated all of the contractual arrangements between the WFOE and the VIEs and exercised our rights under the exclusive call option agreements between the WFOE and the VIEs such that, effective as of September 19, 2022, we obtained 100% of the equity ownership of the entities we formerly consolidated as VIEs and which we now consolidate as wholly-owned subsidiaries.
The following diagram illustrates our corporate structure, including our significant subsidiaries, as of the date of this Form 10-Q. The diagram omits certain entities which are immaterial to our results of operations and financial condition.
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![Remark Org Chart - Oct 2022 No VIE.jpg](https://www.sec.gov/Archives/edgar/data/0001368365/000136836523000065/mark-20230630_g2.jpg)
We are subject to certain legal and operational risks associated with having a significant portion of our operations in China. Chinese laws and regulations governing our current business operations, including the enforcement of such laws and regulations, are sometimes vague and uncertain and can change quickly with little advance notice. The Chinese government may intervene in or influence the operations of our China-based subsidiaries at any time and may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our securities. In addition, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors and cause the value of such securities to
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significantly decline or become worthless. In recent years, the Chinese government adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to the use of variable interest entities, cybersecurity, data security, export control and anti-monopoly concerns. As of the date of this Form 10-Q, we have neither been involved in any investigations on cybersecurity review initiated by any Chinese regulatory authority, nor received any inquiry, notice or sanction. As of the date of this Form 10-Q, no relevant laws or regulations in China explicitly require us to seek approval from the CSRC for any securities listing. As of the date of this Form 10-Q, we have not received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other Chinese governmental authorities relating to securities listings. However, since these statements and regulatory actions are newly published, official guidance and related implementation rules have not all been issued. It is highly uncertain what potential impact such modified or new laws and regulations will have on our ability to conduct our business, accept investments or list or maintain a listing on a U.S. or foreign exchange.
As of the date of this Form 10-Q, we are not required to seek permissions from the CSRC, the CAC or any other entity that is required to approve our operations in China. Nevertheless, Chinese regulatory authorities may in the future promulgate laws, regulations or implement rules that require us or our subsidiaries to obtain permissions from such regulatory authorities to approve our operations or any securities listing.
Holding Foreign Companies Accountable Act
The HFCA Act was enacted on December 18, 2020. The HFCA Act states that if the SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market in the United States. On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction. The Consolidated Appropriations Act, 2023, which was signed into law on December 29, 2022, amended the HFCA Act to reduce the number of consecutive non-inspection years required to trigger the trading prohibition under the HFCA Act from three years to two years.
On December 16, 2021, the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by Chinese and Hong Kong authorities in those jurisdictions.
On August 26, 2022, the CSRC, the Ministry of Finance of the PRC, and the PCAOB signed the Protocol, taking the first step toward opening access for the PCAOB to completely inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong.
On December 15, 2022, the PCAOB vacated its 2021 determination that the positions taken by authorities in mainland China and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions. In view of the PCAOB’s decision to vacate its 2021 determination and until such time as the PCAOB issues any new adverse determination, the SEC has stated that there are no issuers at risk of having their securities subject to a trading prohibition under the HFCA Act. Each year, the PCAOB will reassess its determinations on whether it can inspect and investigate completely audit firms in China, and if, in the future, the PCAOB determines it cannot do so, or if Chinese authorities do not allow the PCAOB complete access for inspections and investigations for two consecutive years, companies engaging China-based public accounting firms would be delisted pursuant to the HFCA Act.
Our auditor, Weinberg & Company, an independent registered public accounting firm headquartered in the United States is currently subject to PCAOB inspections and has been inspected by the PCAOB on a regular basis. However, if the PCAOB is unable to inspect the work papers of our accounting firm in the future, such lack of inspection could cause trading in our common stock to be prohibited under the HFCA Act, and as a result, an exchange may determine to delist our common stock. The delisting and the cessation of trading of our common stock, or the threat of our common stock being delisted and prohibited from being traded, may materially and adversely affect the value of our common stock.
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Transfer of Cash or Assets
Dividend Distributions
As of the date of this Form 10-Q, none of our subsidiaries have made any dividends or distributions to Remark.
We have never declared or paid dividends or distributions on our common equity. We currently intend to retain all available funds and any future consolidated earnings to fund our operations and continue the development and growth of our business; therefore, we do not anticipate paying any cash dividends.
Under Delaware law, a Delaware corporation’s ability to pay cash dividends on its capital stock requires the corporation to have either net profits or positive net assets (total assets less total liabilities) over its capital. If we determine to pay dividends on any of our common stock in the future, as a holding company, we may rely on dividends and other distributions on equity from our subsidiaries for cash requirements, including the funds necessary to pay dividends and other cash contributions to our stockholders.
Our WFOE’s ability to distribute dividends is based upon its distributable earnings. Current Chinese regulations permit our WFOE to pay dividends to its shareholder only out of its registered capital amount, if any, as determined in accordance with Chinese accounting standards and regulations, and then only after meeting the requirement regarding statutory reserve. If our WFOE incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Any limitation on the ability of our WFOE to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business. In addition, any cash dividends or distributions of assets by our WFOE to its stockholder are subject to a Chinese withholding tax of as much as 10%.
The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. If we are unable to receive all of the revenues from our operations through our China-based subsidiaries, we may be unable to pay dividends on our common stock.
AI Business
We generate revenue by using the proprietary data and AI software platform we developed to deliver AI-based computer vision products, computing devices and software-as-a-service solutions for businesses in many industries. We continue to partner with top universities on research projects targeting algorithm, artificial neural network and computing architectures which we believe will keep us among the leaders in technology development.
The primary focus of our business is promoting and facilitating the safety of our customers and their customers through our Smart Safety Platform (the “SSP”). The SSP, having won numerous industry and government benchmark tests for accuracy and speed, is a leading software solution for using computer vision to detect persons, objects and behavior in video feeds. Real-time alerts from the SSP allow operations staff to respond rapidly to prevent any events or activities that can endanger public security or workplace safety.
We deploy the SSP to integrate with each customer’s IT infrastructure, including, in many cases, cameras already in place at the customer’s location(s). When necessary, we also sell and deploy hardware to create or supplement the customer’s monitoring capabilities. Such hardware includes, among other items, cameras, edge computing devices and/or our Smart Sentry units. The Smart Sentry is a large mobile camera unit with a telescoping mast on which a high-quality camera is mounted. Based upon customer needs, the camera may have either standard vision and/or thermal vision capability. The camera works in conjunction with an edge computing device that is also mounted to the unit. The Smart Sentry is an example of how we incorporate the SSP in modern IT architectural concepts, including edge computing and micro-service architectures. Edge computing, for example, allows the SSP to conduct expensive computing tasks at distributed locations without requiring large data transmission over the internet, thereby dramatically reducing costs while integrating numerous and varied sensors at distributed locations.
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We customize and sell our innovative AI-based computer vision products and solutions, including the SSP, to customers in the retail, construction, public safety, workplace safety and public sector markets. We have also developed versions of our solutions for application in the transportation and energy markets.
Overall Business Outlook
The innovative AI and data analytics solutions we sell continue to gain worldwide awareness and recognition through media exposure, comparative testing, product demonstrations and word of mouth resulting from positive customer experiences. We intend to expand our business not only in the Asia-Pacific region, where we believe there still are fast-growth AI market opportunities for our solutions, but also in the United States, and Europe, where we see a tremendous number of requests for AI products and solutions in the workplace and public safety markets. We are also seeing demand from South America, were we intend to also pursue opportunities. However, the COVID-19 pandemic may also present challenges to our business, as could economic and geopolitical conditions in some international regions, and we do not yet know what will be the ultimate effects on our business. We continue to pursue large business opportunities, but anticipating when, or if, we can close these opportunities is difficult. In addition, we may face a large number of well-known competitors which would make deploying our software solutions in the market segments we have identified difficult.
Inflation and Supply Chain
Other than the impact of inflation on the general economy, we do not believe that inflation has had a material effect on our operations to date. However, there is a risk that our operating costs could be subject to inflationary pressures in the future, which would have the effect of increasing our operating costs and cause additional stress on our working capital resources.
We have not experienced any supply chain disruptions that have had a material effect on our operations to date. However, as we work to increase our sales of the SSP in the U.S. and thereby expand our business, we could be subjected to the risk of supply chain disruptions with regard to high-technology products such as servers and related equipment that we use to train our AI software algorithms and which we plan to sell to customers to support operation of the SSP.
Business Developments During 2023
China’s response to the COVID-19 pandemic, known as the Zero-COVID policy, included lockdowns and/or other severe restrictions on business and daily life in China, which made it difficult for us to interact with our clients and vendors through at least December 2022. Such preventative measures have had lingering effects which made it difficult for us to complete many projects in China during the first quarter of 2023. Our customers are only slowly beginning to make the decisions to restart stalled projects or begin new ones. As we expected, we were able to complete more projects in the second quarter of 2023 than in the first quarter of 2023, but we still lagged behind the pace of completions during the six months ending June 30, 2022. The majority of our completed work was related to a large telecommunications provider in China. We expect to continue steadily completing projects in China through the remainder of 2023 as our customers continue to restart projects that were placed on hold during the Zero-COVID policy and initiate new projects that had been on the drawing board when the Zero-COVID policy preventative measures went into effect early 2022.
As we work with customers and partners in China to ramp up business again, we have been working diligently to advance our interests in several large public safety products in the U.S., while our U.K. team has continued to support our U.S. project acquisition efforts as well as develop revenue-generating projects in the U.K. Additionally, we have been developing certain opportunities in South America which could allow us to gain a foothold in that market. All of such efforts to establish ourselves in the U.S., South America and the U.K. have caused increases in various business development expenses, but we expect such efforts to lead to a diversification of our business outside of China and reduce the concentrations in our revenue and associated accounts receivable.
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The following table presents our revenue categories as a percentage of total consolidated revenue during the three and six months ended June 30, 2023 and 2022.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
AI-based products and services | 98 | % | 97 | % | 96 | % | 97 | % | |||||||||||||||
Advertising and other | 2 | % | 3 | % | 4 | % | 3 | % |
CRITICAL ACCOUNTING ESTIMATES
During the three months ended June 30, 2023, we made no material changes to our critical accounting estimates as we disclosed them in Part II, Item 7 of our 2022 Form 10-K.
RESULTS OF OPERATIONS
The following tables summarize our operating results for the six months ended June 30, 2023, and the discussion following the table explains material changes in such operating results compared to the six months ended June 30, 2022.
(dollars in thousands) | Three Months Ended June 30, | Change | |||||||||||||||||||||
2023 | 2022 | Dollars | Percentage | ||||||||||||||||||||
Revenue, including amounts from China Business Partner | $ | 3,167 | $ | 2,558 | $ | 609 | 24 | % | |||||||||||||||
Cost of revenue | 2,511 | 1,847 | 664 | 36 | % | ||||||||||||||||||
Sales and marketing | 387 | 188 | 199 | 106 | % | ||||||||||||||||||
Technology and development | 567 | 508 | 59 | 12 | % | ||||||||||||||||||
General and administrative | 3,244 | 3,933 | (689) | (18) | % | ||||||||||||||||||
Depreciation and amortization | 25 | 37 | (12) | (32) | % | ||||||||||||||||||
Impairments | 392 | — | 392 | ||||||||||||||||||||
Total cost and expense | 7,126 | 6,513 | |||||||||||||||||||||
Interest expense | (858) | (1,774) | 916 | (52) | % | ||||||||||||||||||
Finance cost related to obligations to issue common stock | (1,050) | — | (1,050) | ||||||||||||||||||||
Loss on investment | — | (6,952) | 6,952 | (100) | % | ||||||||||||||||||
Other gain (loss), net | (7) | 152 | (159) | (105) | % | ||||||||||||||||||
Net loss | (5,874) | (12,529) | 6,655 | (53) | % |
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(dollars in thousands) | Six Months Ended June 30, | Change | |||||||||||||||||||||
2023 | 2022 | Dollars | Percentage | ||||||||||||||||||||
Revenue, including amounts from China Business Partner | $ | 3,993 | $ | 7,225 | $ | (3,232) | (45) | % | |||||||||||||||
Cost of revenue | 2,966 | 6,117 | (3,151) | (52) | % | ||||||||||||||||||
Sales and marketing | 753 | 336 | 417 | 124 | % | ||||||||||||||||||
Technology and development | 736 | 963 | (227) | (24) | % | ||||||||||||||||||
General and administrative | 6,077 | 7,872 | (1,795) | (23) | % | ||||||||||||||||||
Depreciation and amortization | 71 | 78 | (7) | (9) | % | ||||||||||||||||||
Impairments | 392 | — | 392 | ||||||||||||||||||||
Total cost and expense | 10,995 | 15,366 | |||||||||||||||||||||
Interest expense | (2,402) | (3,960) | 1,558 | (39) | % | ||||||||||||||||||
Finance cost related to obligations to issue common stock | (4,626) | — | (4,626) | ||||||||||||||||||||
Loss on investment | — | (26,008) | 26,008 | (100) | % | ||||||||||||||||||
Other gain (loss), net | (6) | 151 | (157) | (104) | % | ||||||||||||||||||
Net loss | (14,036) | (37,958) | 23,922 | (63) | % |
Revenue and Cost of Revenue. During the three months ended June 30, 2023, we were able to complete more projects in China as business and economic recovery efforts continue after China lifted most of its onerous COVID-19 related restrictions at the end of 2022. Our efforts allowed us to somewhat outpace our performance in the same period of the prior year, which period included projects associated with our work with an unrelated entity (our China Business Partner).
During the six months ended June 30, 2023, we were unable to complete as many projects in China as we did in the same period of the prior year, primarily due to the slow and methodical business and economic recovery efforts that are ongoing after China lifted most of its onerous COVID-19 related restrictions at the end of 2022.
Cost of revenue during the three and six months ended June 30, 2023 increased and decreased, respectively, in conjunction with the changes in revenue described above.
Sales and marketing. The addition in late 2022 of three new personnel, including two executive positions, on our sales team caused an increase of $0.3 million in payroll and related expense during the six months ended June 30, 2023.
General and administrative. During the three months ended June 30, 2023, we experienced a decrease of approximately $0.4 million in certain expenses related to business development, including short-term work space rentals. Also, our share-based compensation expense decreased by $0.5 million due to a large batch of stock options with a grant date of July 8, 2021 becoming fully expensed in January 2023, in comparison to having three months of expense recognition during the three months ended June 30, 2022.
During the six months ended June 30, 2023, we experienced a decrease of approximately $1.0 million in certain expenses related to business development, including short-term work space rentals. Our share-based compensation expense decreased by $0.8 million due to a large batch of stock options with a grant date of July 8, 2021 becoming fully expensed in January 2023, in comparison to having a full six months of expense recognition during the six months ended June 30, 2022.
Impairments. During the three months ended June 30, 2023, we determined that certain costs that we had capitalized to software development in progress would no longer be recoverable and we recorded an impairment of approximately
$0.2 million. Also, we recorded an impairment of approximately $0.2 million related to certain prepaid expense amounts which were deemed unrecoverable
Interest expense. We executed the Original Mudrick Loan Agreements in December 2021, pursuant to which we obtained the Original Mudrick Loans in the aggregate principal amount of $30.0 million. During the six months ended June 30, 2022, we recorded in interest expense approximately $2.2 million of amortization of debt discount and debt issuance cost related to the Original Mudrick Loans, but did not have any such amortization during the six months ended June 30, 2023 because the debt discount and debt issuance cost were fully amortized during 2022. Interest expense also decreased because significantly less debt principal was outstanding on the Original Mudrick Loans during the three and six months ended June 30, 2023 than during the same period of the prior year, even though the interest rate had increased from 16.5% to 20.5%. Partially offsetting the decreases in interest expense was the amendment and extension fee of approximately $0.8 million we recorded in relation to our entry on March 14, 2023 into the New Mudrick Loan Agreement described, along with the Original Mudrick Loan Agreements, in Note 10 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q.
Finance Cost Related to Obligations to Issue Common Stock. The finance cost during the three and six months ended June 30, 2023 resulted from the establishment and remeasurement of obligations to issue our common stock that we incurred in relation to our transactions with Ionic pursuant to the 2022 Debenture Purchase Agreement, the 2023 Debenture Purchase Agreement, the Letter Agreement and the ELOC Purchase Agreement, each of which is described in Note 11 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q, that we entered into on October 6, 2022, March 14, 2023, January 5, 2023 and October 6, 2022, respectively. We had no similar transaction during the three and six months ended March 31, 2022.
Loss on investment. On July 1, 2021, as the result of a business combination involving a U.S.-based venture, Sharecare, Inc. (“Legacy Sharecare”) and Falcon Capital Acquisition Corp., a special purpose acquisition company, the common stock of the surviving entity of such business combination (“New Sharecare”) became listed on the Nasdaq Stock Market LLC and our equity in Legacy Sharecare converted into cash and shares of publicly traded common stock of New Sharecare. As a result of the common stock of New Sharecare being traded on a national securities exchange, we were able to remeasure our investment at fair value. Since July 1, 2021, the value of the New Sharecare stock steadily declined, which caused the losses on investment during the three and six months ended June 30, 2022. On July 11, 2022, we delivered our remaining 6,250,000 shares of New Sharecare to our lender at their request and, as a result, we did not maintain investments during the six months ended June 30, 2023.
LIQUIDITY AND CAPITAL RESOURCES
Overview
During the six months ended June 30, 2023, and in each fiscal year since our inception, we have incurred net losses which have resulted in a stockholders’ deficit of $28.4 million as of June 30, 2023. Additionally, our operations have historically used more cash than they have provided. Net cash used in operating activities was $5.2 million during the six months ended June 30, 2023. As of June 30, 2023, our cash balance was $0.2 million. Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities give rise to, and management has concluded that there is, substantial doubt regarding our ability to continue as a going concern.
Mudrick Loans
On December 3, 2021, we entered into the Original Mudrick Loan Agreements pursuant to which we incurred the Original Mudrick Loans in the aggregate principal amount of $30.0 million. The Original Mudrick Loans initially bore interest at 16.5% per annum until the original maturity date of July 31, 2022 and, following an amendment we entered into with Mudrick in August 2022, bore interest at 18.5% per annum. The amendment also extended the maturity date of the Original Mudrick Loans from July 31, 2022 to October 31, 2022. However, we did not make the required repayment of the Original Mudrick Loans by October 31, 2022, which constituted an event of default under the Original Mudrick Loans and triggered an increase in the interest rate under the Original Mudrick Loans to 20.5%.
On March 14, 2023, we entered into the New Mudrick Loan Agreement pursuant to which all of the Original Mudrick Loans were cancelled in exchange for the New Mudrick Notes in the aggregate principal amount of approximately $16.3 million. The New Mudrick Notes bear interest at a rate of 20.5% per annum, which shall be payable on the last business day of each month commencing on May 31, 2023. The interest rate will increase by 2% and the principal amount outstanding under
the New Mudrick Notes and any unpaid interest thereon may become immediately due and payable upon the occurrence of any event of default under the New Mudrick Loan Agreement. All amounts outstanding under the New Mudrick Notes, including all accrued and unpaid interest, will be due and payable in full on October 31, 2023. See Note 10 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q for additional information regarding the New Mudrick Notes.
To secure the payment and performance of the obligations under the Original Mudrick Loan Agreements and the New Mudrick Loan Agreement, we, together with the Guarantors, have granted to TMI Trust Company, as the collateral agent for the benefit of Mudrick, a first priority lien on, and security interest in, all assets of Remark and the Guarantors, subject to certain customary exceptions.
In connection with our entry into the Original Mudrick Loan Agreements, we paid to Mudrick an upfront fee equal to 5.0% of the amount of the Original Mudrick Loans, which amount was netted against the drawdown of the Original Mudrick Loans. We recorded the upfront fee as a debt discount of $1.5 million, and recorded debt issuance cost totaling $1.1 million. We amortized the discount on the Original Mudrick Loans and the debt issuance cost over the life of the Original Mudrick Loans and, during the year ended December 31, 2022, we amortized $2.2 million of such discount and debt issuance cost. In consideration for the amendment we entered into with Mudrick in August 2022, we paid Mudrick an amendment and extension fee in the amount of 2.0% of the then unpaid principal balance of the Original Mudrick Loans, which was approximately $0.3 million, by adding such amount to the principal balance of the Original Mudrick Loans.
As of the date of this Form 10-Q, the principal amount outstanding, together with interest on the unpaid principal balance of the New Mudrick Notes, is $16.6 million.
Ionic Transactions
On October 6, 2022, we entered into the 2022 Debenture Purchase Agreement with Ionic, pursuant to which we issued the 2022 Debenture to Ionic for a purchase price of $2.5 million.
In connection with the 2022 Debenture, on October 6, 2022, we also entered into the ELOC Purchase Agreement, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Ionic to purchase up to an aggregate of $50.0 million of shares of our common stock over the 36-month term of the ELOC Purchase Agreement. Under the ELOC Purchase Agreement, after the satisfaction of certain commencement conditions, we have the right to present Ionic with a purchase notice directing Ionic to purchase any amount up to $3.0 million of our common stock per trading day, at the purchase price equal to 90% (or 80% if our common stock is not then trading on Nasdaq) of the average of the five lowest VWAPs of our common stock over a specified measurement period. With each purchase under the ELOC Purchase Agreement, we are required to deliver to Ionic an additional number of shares equal to 2.5% of the number of shares of common stock deliverable upon such purchase.
On November 7, 2022, we entered into an amendment to the 2022 Debenture Purchase Agreement with Ionic, pursuant to which we and Ionic agreed to amend and restate the 2022 Debenture to provide that (i) in no event will the conversion price under the 2022 Debenture be below a floor price of $0.10 (such price, as may be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction, the “Floor Price”), and (ii) in the event the actual conversion price is less than the Floor Price, (A) Ionic will be entitled to that number of settlement conversion shares issuable with an assumed conversion price equal to the Floor Price, and (B) we will be required to make a cash payment to Ionic on or prior to the maturity date of an amount that is calculated by subtracting the number of shares of common stock issuable at an assumed conversion price equal to the Floor Price from the number of shares of common stock issuable at the actual conversion price, multiplied by a price equal to the average of the ten lowest VWAPs during the specified measurement period.
On January 5, 2023, we and Ionic entered the Letter Agreement which amended the ELOC Purchase Agreement. Under the Letter Agreement, the parties agreed, among other things, to (i) amend the floor price below which Ionic will not be required to buy any shares of our common stock under the ELOC Purchase Agreement from $0.25 to $0.20, determined on a post-reverse split basis, (ii) amend the per share purchase price for purchases under the ELOC Purchase Agreement to 90% of the average of the two lowest daily VWAPs over a specified measurement period, which will commence at the conclusion of the applicable measurement period related to the 2022 Debenture and (iii) waive certain requirements in the ELOC Purchase Agreement to allow for a one-time $0.5 million purchase under the ELOC Purchase Agreement.
On March 14, 2023, we entered into the 2023 Debenture Purchase Agreement with Ionic pursuant to which we authorized the issuance and sale of two convertible subordinated debentures in the aggregate principal amount of approximately $2.8 million for an aggregate purchase price of $2.5 million. The first debenture is in the original principal amount of approximately $1.7 million for a purchase price of $1.5 million, which was issued on March 14, 2023, and the second debenture is in the
original principal amount of approximately $1.1 million for a purchase price of $1.0 million, which was issued on April 12, 2023.
On July 12, 2023, we and Ionic entered into the July 2023 Letter Agreement which amends the ELOC Purchase Agreement as previously amended on January 5, 2023.
Under the July 2023 Letter Agreement, the parties agreed, among other things, to (i) allow Remark to deliver one or more irrevocable written notices (“Exemption Purchase Notices”) to Ionic in a total aggregate amount not to exceed $20.0 million, which total aggregate amount shall be reduced by the aggregate amount of previous Exemption Purchase Notices, (ii) amend the per share purchase price for purchases under an Exemption Purchase Notice to 80% of the average of the two lowest daily volume-weighted average prices (“VWAPs”) over a specified measurement period, (iii) amend the definition of the specified measurement period to stipulate that, for purposes of calculating the final purchase price, such measurement period begins the trading day after Ionic pays Remark the amount requested in the purchase notice, while the calculation of the dollar volume of Remark common stock traded on the principal market to determine the length of the measurement period shall begin on the trading day after the previous measurement period ends, and iv) that any additional Exemption Purchase Notices that are not in accordance with the terms and provisions of the Purchase Agreement shall be subject to Ionic’s approval.
See Note 11 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q for additional detail on the Ionic transactions.
General
Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities give rise to substantial doubt regarding our ability to continue as a going concern.
We intend to fund our future operations and meet our financial obligations through revenue growth from our AI offerings, as well as through sales of our thermal-imaging products. We cannot, however, provide assurance that revenue, income and cash flows generated from our businesses will be sufficient to sustain our operations in the twelve months following the filing of this Form 10-Q. As a result, we are actively evaluating strategic alternatives including debt and equity financings.
Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (in particular, as a result of the COVID-19 pandemic, global supply chain disruptions, inflation and other cost increases, and the geopolitical conflict in Ukraine), will play primary roles in determining whether we can successfully obtain additional capital.
A variety of factors, many of which are outside of our control, affect our cash flow; those factors include the effects of the COVID-19 pandemic, regulatory issues, competition, financial markets and other general business conditions. Based on financial projections, we believe that we will be able to meet our ongoing requirements for at least the next 12 months with existing cash and based on the probable success of one or more of the following plans:
•develop and grow new product line(s)
•obtain additional capital through equity issuances.
However, projections are inherently uncertain and the success of our plans is largely outside of our control. As a result, there is substantial doubt regarding our ability to continue as a going concern, and we may fully utilize our cash resources prior to September 30, 2023.
Cash Flows - Operating Activities
During the six months ended June 30, 2023, we used $5.9 million less cash in operating activities than we did during the same period of the prior year. The decrease in cash used in operating activities is primarily the result of the timing of payments related to elements of working capital.
Cash Flows - Investing Activities
Investing activities during the six months ended June 30, 2023 were de minimis, while the same period during 2022 provided $3.8 million in proceeds from the sale of a portion of our marketable securities.
Cash Flows - Financing Activities
During the six months ended June 30, 2023, we received $2.5 million from Ionic in exchange for the issuance of convertible debentures, and Ionic also advanced us an aggregate of $3.0 million under the ELOC Purchase Agreement for which we issued 2,641,173 shares of our common stock and for which we expect to issue another estimated 978,168 shares of our common stock. Also during the six months ended June 30, 2023, we received $0.7 million of advances from senior management representing various operating expense payments and repaid $0.8 million of advances from senior management. During the same period of 2022, we repaid $6.2 million of the Original Mudrick Loans and received $1.5 million of advances from senior management representing various operating expense payments made on our behalf.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
Please refer to Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this report for a discussion regarding recently issued accounting pronouncements which may affect us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to provide reasonable assurance that the information we must disclose in reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We designed our disclosure controls with the objective of ensuring we accumulate and communicate this information to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under Exchange Act, as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that, because of the material weaknesses in our internal control over financial reporting related to: (i) insufficient documentary evidence that we had reviewed information underlying manual journal entries at a sufficient level of detail, (ii) insufficient documentation of our consideration of appropriate revenue recognition criteria for certain contracts arising from our AI business in China, (iii) an aggregation of deficiencies in our monitoring and activity-level controls related to processes in our AI business in China including accounts payable, accrued liabilities, payroll and fixed assets, and (iv) failure to retain documentary evidence of all inventory purchases and the insufficient evaluation of the impact of discounted sales transactions on the valuation of our inventory, all of which we described in our 2022 Form 10-K, our disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2023.
Changes in Internal Control over Financial Reporting
In our 2022 Form 10-K, we disclosed that management had determined that material weaknesses in our internal control over financial reporting (described above) existed. As of the date of this report, the implementation of the plan developed by management to remediate the underlying causes of the material weaknesses and improve the design and operating effectiveness of internal control over financial reporting and our disclosure controls continues. Such implementation has been slowed by various factors, including the COVID-19 pandemic. As a result, there was no change in our internal control over financial reporting during the three months ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and the risk factors discussed in Part I, Item 1A of our 2022 Form 10-K, together with all the other information in this Form 10-Q, including our unaudited condensed financial statements and notes thereto, which could materially affect our business, financial condition or operating results. The risks described below and in our 2022 Form 10-K are not the only risks we face. Additional risks and uncertainties that we are unaware of may become important factors that affect us. If any of these risks actually occur, our business, financial condition or operating results may suffer, the trading price of our common stock could decline, and you may lose all or part of your investment. The following information updates, and should be read in conjunction with the information disclosed in Part I, Item 1A, “Risk Factors,” contained in our 2022 Form 10-K. Except as disclosed below, there have been no material changes from the risk factors disclosed in our 2022 Form 10-K.
We have a history of operating losses and we may not generate sufficient revenue to support our operations.
During the year ended December 31, 2022, and in each fiscal year since our inception, we have incurred net losses and generated negative cash flow from operations, resulting in an accumulated deficit of $(388.5) million as of December 31, 2022 and an accumulated deficit of $(402.6) million as of June 30, 2023. In addition, for the six months ended June 30, 2023, we had a net loss of $(14.0) million.
We cannot provide assurance that revenue generated from our businesses will be sufficient to sustain our operations in the long term. As a result, we are actively evaluating strategic alternatives including debt and equity financings. Should we fail to successfully implement our plans described herein, such failure would have a material adverse effect on our business, including the possible cessation of operations.
Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (in particular, as a result of the COVID-19 pandemic, global supply chain disruptions, inflation and other cost increases, and the geopolitical conflict in Ukraine) will play primary roles in determining whether we can successfully obtain additional capital. We cannot be certain that we will be successful at raising capital, whether in an equity financing or debt financing, on commercially reasonable terms, if at all. In addition, if we obtain capital by issuing equity, such transaction(s) may dilute existing stockholders.
We may not have sufficient cash to repay our outstanding senior secured indebtedness.
As of June 30, 2023, the entire aggregate principal amount of $16.3 million remained outstanding under the New Mudrick Notes, which will be due and payable in full on October 31, 2023. Our available cash and other liquid assets are currently not sufficient to pay such obligations in full. If we do not pay the New Mudrick Notes in full on the scheduled maturity date, Mudrick will have available to them all rights under the New Mudrick Loan Agreements and applicable law, which include, without limitation, foreclosing on the collateral securing the New Mudrick Notes. Mudrick’s exercise of any such rights could have a material adverse effect on our financial condition.
38 | Financial Statement Index |
We did not make a required repayment of the outstanding loans under the New Mudrick Loan Agreement by June 30, 2023, which constitutes an event of default for which we have not received a waiver as of the date of this Form 10-Q. While we are actively engaged in discussions with Mudrick regarding a resolution of the event of default, we cannot provide any assurance that we will be successful in obtaining a waiver or that Mudrick will continue to forebear from taking any enforcement actions against us.
We are dependent on a small number of customers for a large percentage of our revenue.
We have a concentration in the volume of business we transacted with customers, as during the six months ended June 30, 2023, three of our customers represented about 40%, 35% and 11% of our revenue, respectively, while during six months ended June 30, 2022, two customers represented about 51% and 32%, respectively, of our revenue. At June 30, 2023, accounts receivable from four of our customers represented about 15%, 13%, 12% and 10%, respectively, of our gross accounts receivable, while at December 31, 2022, accounts receivable from our three largest customers represented about 23%, 16% and 10%, respectively, of our gross accounts receivable. The loss of any of these large customers would have a material adverse impact on our financial results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not sell any equity securities during the quarter ended June 30, 2023 in transactions that were not registered under the Securities Act other than as previously disclosed in our filings with the SEC and as described below.
On April 12, 2023, we issued a convertible subordinated debenture in the original principal amount of $1,111,000 to Ionic Ventures, LLC in a private placement for a purchase price of $1,000,000.
We made the offer and sale of securities in the above-described private placement in reliance upon an exemption from registration requirements pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended, based upon representations made to us by the investor in a purchase agreement we entered into with the investor.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We did not make a required repayment of the outstanding loans under the New Mudrick Loan Agreement by June 30, 2023, which constitutes an event of default for which we have not received a waiver as of the date of this Form 10-Q. While we are actively engaged in discussions with Mudrick regarding a resolution of the event of default, we cannot provide any assurance that we will be successful in obtaining a waiver or that Mudrick will continue to forebear from taking any enforcement actions against us. As of the date of this Form 10-Q, the principal amount outstanding, together with interest on the unpaid principal balance of the Mudrick Loan, is approximately $16.6 million.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Incorporated Herein By Reference To | ||||||||||||||||||||||||||||||||
Exhibit Number | Description | Document | File Number | Filed On | Exhibit Number | |||||||||||||||||||||||||||
8-K | 001-33720 | 12/30/2014 | 3.1 | |||||||||||||||||||||||||||||
8-K | 001-33720 | 01/12/2016 | 3.1 | |||||||||||||||||||||||||||||
8-K | 001-33720 | 06/08/2016 | 3.1 | |||||||||||||||||||||||||||||
8-K | 001-33720 | 04/11/2017 | 3.1 | |||||||||||||||||||||||||||||
8-K | 001-33720 | 07/09/2021 | 3.1 | |||||||||||||||||||||||||||||
8-K | 001-33720 | 12/21/2022 | 3.1 | |||||||||||||||||||||||||||||
8-K | 001-33720 | 02/13/2015 | 3.1 | |||||||||||||||||||||||||||||
101.INS* | Inline XBRL Instance Document | |||||||||||||||||||||||||||||||
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||||||||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||||||||
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||||||||
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||||||||||||||||||||
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||||||||
104* | The cover page from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL (included as Exhibit 101). |
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REMARK HOLDINGS, INC. | ||||||||||||||
Date: | August 14, 2023 | By: | /s/ Kai-Shing Tao | |||||||||||
Kai-Shing Tao | ||||||||||||||
Chairman and Chief Executive Officer | ||||||||||||||
(principal executive, financial and accounting officer) |