UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FORM
10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31,June 30, 2020
Commission File Number 001-33720
Remark Holdings, Inc.
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| | | | | | | | | | | | | |
| 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
702-701-9514
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
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| | | | | | | | | | | | | |
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 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.
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| | | | | | | | | | | | | |
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 July 3,August 11, 2020, a total of 99,408,916 shares of our common stock were outstanding.
TABLE OF CONTENTS
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PART I | | |
Item 1. | Financial Statements | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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RELIANCE ON SEC ORDER GRANTING CONDITIONAL EXEMPTIONS DUE TO CIRCUMSTANCES RELATED TO COVID-19
In accordance with the Securities and Exchange Commission (the “SEC”) Order Under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies, SEC Release No. 34-88465, dated March 25, 2020 (the “Order”), Remark Holdings, Inc. (“we” or “our”) filed a Current Report on Form 8-K with the SEC on May 13, 2020 stating that we are relying on the relief provided by the Order to delay the filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 by up to 45 days. We maintain offices in the cities of Chengdu, Shanghai and Hangzhou in China. As early as January 2020, in response to the early stages of what would become the COVID-19 pandemic, national and local governmental authorities in China began to shut down most forms of public transportation and impose restrictions on travel, public gatherings and non-essential businesses. The restrictions prevented our employees from leaving their homes, from being able to obtain needed information from vendors and customers and, as a result, from completing tasks essential to our accounting and financial reporting process on a timely basis. As a result, we were not able to timely review and prepare our financial statements for the quarter ended March 31, 2020.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The matters discussed in this Quarterly Report on Form 10-Q include “forward-looking statements” about the plans, strategies, objectives, goals or expectations of Remark Holdings, Inc. and subsidiaries (“Remark”, “we”, “us”“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.
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 Securities and Exchange Commission (“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
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ITEM 1. | ITEM 1. FINANCIAL STATEMENTS |
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
| | | | March 31, 2020 | | December 31, 2019 | | June 30, 2020 | | December 31, 2019 |
| (Unaudited) | | | | (Unaudited) | | |
Assets | | | | Assets | |
Cash and cash equivalents | $ | 1,617 |
| | $ | 272 |
| Cash and cash equivalents | $ | 10,233 | | | $ | 272 | |
| Trade accounts receivable, net | 1,540 |
| | 1,964 |
| Trade accounts receivable, net | 2,235 | | | 1,964 | |
Receivable from related parties | 531 |
| | — |
| Receivable from related parties | 531 | | | — | |
Prepaid expense and other current assets | 4,617 |
| | 4,623 |
| Prepaid expense and other current assets | 5,803 | | | 4,623 | |
| Total current assets | 8,305 |
| | 6,859 |
| Total current assets | 18,802 | | | 6,859 | |
| Property and equipment, net | 180 |
| | 341 |
| Property and equipment, net | 156 | | | 341 | |
Operating lease assets | 314 |
| | 4,359 |
| Operating lease assets | 470 | | | 4,359 | |
Investment in unconsolidated affiliates | 1,934 |
| | 1,935 |
| Investment in unconsolidated affiliates | 1,922 | | | 1,935 | |
Intangibles, net | 490 |
| | 509 |
| Intangibles, net | 472 | | | 509 | |
| Other long-term assets | 773 |
| | 824 |
| Other long-term assets | 1,254 | | | 824 | |
| Total assets | $ | 11,996 |
| | $ | 14,827 |
| Total assets | $ | 23,076 | | | $ | 14,827 | |
Liabilities and Stockholders’ Deficit | | | | Liabilities and Stockholders’ Deficit | | | |
Accounts payable | $ | 8,525 |
| | $ | 8,126 |
| Accounts payable | $ | 7,709 | | | $ | 8,126 | |
Accrued expense and other current liabilities | 13,307 |
| | 14,326 |
| Accrued expense and other current liabilities | 13,295 | | | 14,326 | |
| Contract liability | 367 |
| | 313 |
| Contract liability | 566 | | | 313 | |
Note payable | 3,000 |
| | 3,000 |
| Note payable | 2,000 | | | 3,000 | |
Loans payable, current, net of unamortized discount and debt issuance cost | 11,931 |
| | 12,025 |
| |
Loans payable, current | | Loans payable, current | — | | | 12,025 | |
| Total current liabilities | 37,130 |
| | 37,790 |
| Total current liabilities | 23,570 | | | 37,790 | |
Loans payable, long-term | | Loans payable, long-term | 425 | | | — | |
Operating lease liabilities, long-term | 79 |
| | 4,650 |
| Operating lease liabilities, long-term | 202 | | | 4,650 | |
Warrant liability | 58 |
| | 115 |
| Warrant liability | 6,318 | | | 115 | |
| Total liabilities | 37,267 |
| | 42,555 |
| Total liabilities | 30,515 | | | 42,555 | |
| | | | | | | |
Commitments and contingencies (Note 13) |
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| |
|
| Commitments and contingencies (Note 13) | |
| | | | |
Preferred stock, $0.001 par value; 1,000,000 shares authorized; none issued | — |
| | — |
| |
Common stock, $0.001 par value; 100,000,000 shares authorized; 66,133,888 and 51,055,159 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 66 |
| | 51 |
| |
Preferred stock,$0.001 par value; 1,000,000 shares authorized; none issued | | Preferred stock,$0.001 par value; 1,000,000 shares authorized; none issued | — | | | — | |
Common stock, $0.001 par value; 100,000,000 shares authorized; 99,408,916 and 51,055,159 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively | | Common stock, $0.001 par value; 100,000,000 shares authorized; 99,408,916 and 51,055,159 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively | 99 | | | 51 | |
Additional paid-in-capital | 323,958 |
| | 319,275 |
| Additional paid-in-capital | 351,417 | | | 319,275 | |
Accumulated other comprehensive income | (45 | ) | | (227 | ) | Accumulated other comprehensive income | 111 | | | (227) | |
Accumulated deficit | (349,250 | ) | | (346,827 | ) | Accumulated deficit | (359,066) | | | (346,827) | |
Total stockholders’ deficit | (25,271 | ) | | (27,728 | ) | Total stockholders’ deficit | (7,439) | | | (27,728) | |
Total liabilities and stockholders’ deficit | $ | 11,996 |
| | $ | 14,827 |
| Total liabilities and stockholders’ deficit | $ | 23,076 | | | $ | 14,827 | |
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(dollars in thousands, except per share amounts)
| | | Three Months Ended March 31, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenue | $ | 431 |
| | $ | 1,209 |
| Revenue | $ | 2,299 | | | $ | 2,865 | | | $ | 2,730 | | | $ | 4,074 | |
Cost and expense | | | | Cost and expense | |
Cost of revenue (excluding depreciation and amortization) | 21 |
| | 1,593 |
| Cost of revenue (excluding depreciation and amortization) | 1,210 | | | 1,541 | | | 1,231 | | | 3,134 | |
Sales and marketing | 416 |
| | 859 |
| Sales and marketing | 486 | | | 687 | | | 902 | | | 1,546 | |
Technology and development | 648 |
| | 1,304 |
| Technology and development | 1,477 | | | 854 | | | 2,125 | | | 2,158 | |
General and administrative | 2,740 |
| | 2,977 |
| General and administrative | 1,898 | | | 2,454 | | | 4,638 | | | 5,431 | |
Depreciation and amortization | 90 |
| | 325 |
| Depreciation and amortization | 66 | | | 260 | | | 156 | | | 585 | |
| Other operating expense | — |
| | 6 |
| Other operating expense | — | | | — | | | — | | | 6 | |
Total cost and expense | 3,915 |
| | 7,064 |
| Total cost and expense | 5,137 | | | 5,796 | | | 9,052 | | | 12,860 | |
Operating loss | (3,484 | ) | | (5,855 | ) | Operating loss | (2,838) | | | (2,931) | | | (6,322) | | | (8,786) | |
Other income (expense) | | | | Other income (expense) | |
Interest expense | (461 | ) | | (387 | ) | Interest expense | (775) | | | (553) | | | (1,236) | | | (940) | |
Other income (expense), net | — |
| | (45 | ) | |
Other income, net | | Other income, net | 57 | | | 92 | | | 57 | | | 47 | |
| Change in fair value of warrant liability | 57 |
| | (1,416 | ) | Change in fair value of warrant liability | (6,260) | | | 2,078 | | | (6,203) | | | 662 | |
Gain on lease termination | 1,538 |
| | — |
| Gain on lease termination | — | | | — | | | 1,538 | | | — | |
Other loss, net | (73 | ) | | (26 | ) | Other loss, net | — | | | 27 | | | (73) | | | 1 | |
Total other income (expense), net | 1,061 |
| | (1,874 | ) | Total other income (expense), net | (6,978) | | | 1,644 | | | (5,917) | | | (230) | |
Loss from continuing operations before income taxes | (2,423 | ) | | (7,729 | ) | Loss from continuing operations before income taxes | (9,816) | | | (1,287) | | | (12,239) | | | (9,016) | |
Benefit from income taxes | — |
| | — |
| Benefit from income taxes | — | | | — | | | — | | | — | |
Loss from continuing operations | $ | (2,423 | ) | | $ | (7,729 | ) | Loss from continuing operations | (9,816) | | | (1,287) | | | (12,239) | | | (9,016) | |
Loss from discontinued operations, net of tax (Note 17) | — |
| | (1,123 | ) | Loss from discontinued operations, net of tax (Note 17) | — | | | (1,487) | | | — | | | (2,610) | |
Net loss | $ | (2,423 | ) | | $ | (8,852 | ) | Net loss | $ | (9,816) | | | $ | (2,774) | | | $ | (12,239) | | | $ | (11,626) | |
Other comprehensive income (loss) | | | | Other comprehensive income (loss) | | | | | | | |
Foreign currency translation adjustments | 182 |
| | (94 | ) | Foreign currency translation adjustments | 156 | | | 127 | | | 338 | | | 33 | |
Comprehensive loss | $ | (2,241 | ) | | $ | (8,946 | ) | Comprehensive loss | $ | (9,660) | | | $ | (2,647) | | | $ | (11,901) | | | $ | (11,593) | |
| | | | | | | | | | | |
Weighted-average shares outstanding, basic and diluted | 53,775 |
| | 39,258 |
| Weighted-average shares outstanding, basic and diluted | 89,264 | | | 43,335 | | | 71,527 | | | 39,994 | |
| | | | | | | | | | | |
Net loss per share, basic and diluted | | | | Net loss per share, basic and diluted | |
Continuing operations | $ | (0.05 | ) | | $ | (0.20 | ) | Continuing operations | $ | (0.11) | | | $ | (0.03) | | | $ | (0.17) | | | $ | (0.23) | |
Discontinued operations | — |
| | (0.03 | ) | Discontinued operations | — | | | (0.03) | | | — | | | (0.07) | |
Consolidated | $ | (0.05 | ) | | $ | (0.23 | ) | Consolidated | $ | (0.11) | | | $ | (0.06) | | | $ | (0.17) | | | $ | (0.30) | |
| | | | | | | | | | | |
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Deficit
(in thousands, except number of shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | | | | | | | |
| Common Stock Shares | | Common Stock Par Value | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total |
Balance at March 31, 2020 | 66,133,888 | | | $ | 66 | | | $ | 323,958 | | | $ | (45) | | | $ | (349,250) | | | (25,271) | |
Net loss | — | | | — | | | — | | | — | | | (9,816) | | | (9,816) | |
Share-based compensation | — | | | — | | | 47 | | | — | | | — | | | 47 | |
Common stock issued | 33,220,164 | | | 33 | | | 27,345 | | | — | | | — | | | 27,378 | |
Equity instrument exercises | 54,864 | | | — | | | 67 | | | — | | | — | | | 67 | |
Other | — | | | — | | | — | | | 156 | | | — | | | 156 | |
Balance at June 30, 2020 | 99,408,916 | | | $ | 99 | | | $ | 351,417 | | | $ | 111 | | | $ | (359,066) | | | $ | (7,439) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | | | | | | | | | |
| Common Stock Shares | | Common Stock Par Value | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total |
Balance at March 31, 2019 | 40,722,229 | | | $ | 41 | | | $ | 310,618 | | | $ | (62) | | | $ | (330,065) | | | $ | (19,468) | |
Net loss | — | | | — | | | — | | | — | | | (2,774) | | | (2,774) | |
Share-based compensation | — | | | — | | | 216 | | | — | | | — | | | 216 | |
Common stock issued | 5,407,930 | | | 5 | | | 4,995 | | | — | | | — | | | 5,000 | |
| | | | | | | | | | | |
Other | — | | | — | | | — | | | 127 | | | — | | | 127 | |
Balance at June 30, 2019 | 46,130,159 | | | $ | 46 | | | $ | 315,829 | | | $ | 65 | | | $ | (332,839) | | | $ | (16,899) | |
| | | | | | | | | | | |
| Six Months Ended June 30, 2020 | | | | | | | | | | |
| Common Stock Shares | | Common Stock Par Value | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total |
Balance at December 31, 2019 | 51,055,159 | | | $ | 51 | | | $ | 319,275 | | | $ | (227) | | | $ | (346,827) | | | $ | (27,728) | |
Net loss | — | | | — | | | — | | | — | | | (12,239) | | | (12,239) | |
Share-based compensation | — | | | — | | | 93 | | | — | | | — | | | 93 | |
Common stock issued | 48,298,893 | | | 48 | | | 31,982 | | | — | | | — | | | 32,030 | |
Equity instrument exercises | 54,864 | | | — | | | 67 | | | — | | | — | | | 67 | |
Other | — | | | — | | | — | | | 338 | | | — | | | 338 | |
Balance at June 30, 2020 | 99,408,916 | | | $ | 99 | | | $ | 351,417 | | | $ | 111 | | | $ | (359,066) | | | $ | (7,439) | |
| | | | | | | | | | | |
| Six Months Ended June 30, 2019 | | | | | | | | | | |
| Common Stock Shares | | Common Stock Par Value | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total |
Balance at December 31, 2018 | 39,053,312 | | | $ | 39 | | | $ | 308,018 | | | $ | 32 | | | $ | (321,213) | | | $ | (13,124) | |
Net loss | — | | | — | | | — | | | — | | | (11,626) | | | (11,626) | |
| | | | | | | | | | | |
Share-based compensation | — | | | — | | | 314 | | | — | | | — | | | 314 | |
Common stock issued | 7,074,597 | | | 7 | | | 7,493 | | | — | | | — | | | 7,500 | |
Equity instrument exercises | 2,250 | | | — | | | 4 | | | — | | | — | | | 4 | |
| | | | | | | | | | | |
Other | — | | | — | | | — | | | 33 | | | — | | | 33 | |
Balance at June 30, 2019 | 46,130,159 | | | $ | 46 | | | $ | 315,829 | | | $ | 65 | | | $ | (332,839) | | | $ | (16,899) | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| Common Stock Shares | | Common Stock Par Value | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total |
Balance at December 31, 2019 | 51,055,159 |
| | $ | 51 |
| | $ | 319,275 |
| | $ | (227 | ) | | $ | (346,827 | ) | | $ | (27,728 | ) |
Net loss | — |
| | — |
| | — |
| | — |
| | (2,423 | ) | | (2,423 | ) |
Share-based compensation | — |
| | — |
| | 47 |
| | — |
| | — |
| | 47 |
|
Common stock issued | 15,078,729 |
| | 15 |
| | 4,636 |
| | — |
| | — |
| | 4,651 |
|
Other | — |
| | — |
| | — |
| | 182 |
| | — |
| | 182 |
|
Balance at March 31, 2020 | 66,133,888 |
| | $ | 66 |
| | $ | 323,958 |
| | $ | (45 | ) | | $ | (349,250 | ) | | $ | (25,271 | ) |
| | | | | | | | | | | |
| Three Months Ended March 31, 2019 |
| Common Stock Shares | | Common Stock Par Value | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total |
Balance at December 31, 2018 | 39,053,312 |
| | $ | 39 |
| | $ | 308,018 |
| | $ | 32 |
| | $ | (321,213 | ) | | $ | (13,124 | ) |
Net loss | — |
| | — |
| | — |
| | — |
| | (8,852 | ) | | (8,852 | ) |
Share-based compensation | — |
| | — |
| | 98 |
| | — |
| | — |
| | 98 |
|
Common stock issued | 1,666,667 |
| | 2 |
| | 2,498 |
| | — |
| | — |
| | 2,500 |
|
Equity instrument exercises | 2,250 |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
Other | — |
| | — |
| | — |
| | (94 | ) | | — |
| | (94 | ) |
Balance at March 31, 2019 | 40,722,229 |
| | $ | 41 |
| | $ | 310,618 |
| | $ | (62 | ) | | $ | (330,065 | ) | | $ | (19,468 | ) |
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
| | | | Six Months Ended June 30, | |
| | | 2020 | | 2019 |
| | | | Three Months Ended March 31, | |
| 2020 | | 2019 | |
Net cash used in continuing operating activities | $ | (2,810 | ) |
| $ | (5,969 | ) | Net cash used in continuing operating activities | $ | (9,247) | | | $ | (7,496) | |
Net cash provided in discontinued operating activities | — |
| | 5,898 |
| Net cash provided in discontinued operating activities | — | | | (7,159) | |
Net cash used in operating activities | (2,810 | ) | | (71 | ) | Net cash used in operating activities | (9,247) | | | (14,655) | |
Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
Proceeds from sale of business | | Proceeds from sale of business | — | | | 30,000 | |
| Purchases of property, equipment and software | | Purchases of property, equipment and software | (9) | | | (2) | |
Payment of payroll costs capitalized to software in progress | — |
| | (83 | ) | Payment of payroll costs capitalized to software in progress | — | | | (127) | |
| Net cash provided by (used in) continuing investing activities | — |
|
| (83 | ) | Net cash provided by (used in) continuing investing activities | (9) | | | 29,871 | |
Net cash used in discontinued investing activities | — |
| | (247 | ) | Net cash used in discontinued investing activities | — | | | (18,396) | |
Net cash used in investing activities | — |
| | (330 | ) | Net cash used in investing activities | (9) | | | 11,475 | |
Cash flows from financing activities: |
| |
| Cash flows from financing activities: | | | |
Proceeds from issuance of common stock, net | 4,627 |
| | 2,504 |
| Proceeds from issuance of common stock, net | 32,073 | | | 7,504 | |
Proceeds from debt issuance | | Proceeds from debt issuance | 425 | | | — | |
Payment of loan fees and debt issuance cost | | Payment of loan fees and debt issuance cost | — | | | (2,275) | |
Repayments of debt | (472 | ) | | — |
| Repayments of debt | (13,281) | | | (25,526) | |
| Net cash provided by financing activities | 4,155 |
|
| 2,504 |
| Net cash provided by financing activities | 19,217 | | | (20,297) | |
Net change in cash, cash equivalents and restricted cash | 1,345 |
|
| 2,103 |
| Net change in cash, cash equivalents and restricted cash | 9,961 | | | (23,477) | |
Cash, cash equivalents and restricted cash: |
|
| | | Cash, cash equivalents and restricted cash: | | | |
Beginning of period, including cash in disposal group | 272 |
| | 25,548 |
| Beginning of period, including cash in disposal group | 272 | | | 25,548 | |
| End of period | $ | 1,617 |
| | $ | 27,651 |
| End of period | $ | 10,233 | | | $ | 2,071 | |
| | | | | | | |
Supplemental cash flow information: | | | | Supplemental cash flow information: | |
Cash paid for interest | $ | — |
| | $ | 13 |
| Cash paid for interest | $ | 833 | | | $ | 2,211 | |
| | | | | | | |
Supplemental schedule of non-cash investing and financing activities: | | | | Supplemental schedule of non-cash investing and financing activities: | |
| Capitalization of interest to debt principal | $ | 378 |
| | $ | — |
| Capitalization of interest to debt principal | $ | 256 | | | $ | 171 | |
| Increase in loan payable | | Increase in loan payable | $ | — | | | $ | 1,103 | |
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. ORGANIZATION AND BUSINESS
Organization and Business
Remark Holdings, Inc. and subsidiaries (“Remark”, “we”, “us”, or “our”), which include its consolidated variable-interest entities (“VIEs”), are primarily technology-focused. Our KanKan data intelligence platform serves as the basis for our development and deployment of artificial-intelligence-based (“AI-based”) solutions for businesses in many industries and geographies. We also own and operate an e-commerce digital media property focused on a luxury beach lifestyle. Our common stock is listed on the Nasdaq Capital Market under the ticker symbol MARK.
We recognize revenue primarily from sales in the U.S. and China of AI-based products and services from our KanKan business.
COVID-19
Our unaudited condensed consolidated interim financial statements for the three and six months ended March 31,June 30, 2020 were impacted by the effects of the global outbreak of a novel strain of coronavirus, or COVID-19, as national and local governmental authorities in China and the U.S., where we operate, have placed significant restrictions on travel and other activities within their respective countries, leading to extended business closures. The restrictions and resulting business closures have limited our operational capabilities, which could have a material adverse impact on our business and which have created significant uncertainties, such as the potential adverse effect of the pandemic on the economy, our vendors, our employees and customers and customer sentiment in general.
The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration and severity of the outbreak, the length of the travel restrictions and business closures imposed 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 is changing rapidly, and additional impacts of which we are not currently aware may arise. We are closely monitoring developments in the U.S. and in China and are continually assessing the potential impact on our business.
To mitigate the potential material negative effects that COVID-19 may have on our business and to do our part to provide customers with the means to limit the spread of COVID-19, we have repurposed and improved our existing urban life cycle solution that we were selling to make schools in China “smart” schools to build a new product line of high-quality, highly-effective thermal imaging solutions that leverage our innovative software to provide customers with the ability to scan crowds and areas of high foot traffic for indications that certain persons may require secondary screening. We have begun sales efforts primarily in the U.S., as well as in other countries, though no revenue was recognized from this new product line during the three months ended March 31, 2020.countries.
Going Concern
During the threesix months ended March 31,June 30, 2020, and in each fiscal year since our inception, we have incurred net losses which have resulted in an accumulated deficit of $349.3$359.1 million as of March 31,June 30, 2020. Additionally, our operations have historically used more cash than they have provided. Net cash used in continuing operating activities was $2.8$9.2 million during the threesix months ended March 31,June 30, 2020. As of March 31,June 30, 2020, our cash and cash equivalents balance was $1.6$10.2 million, and we had a negative working capital balance of $28.8$4.8 million.
On March 3, 2020, we entered into a common stock purchase agreement, (thelater amended on April 9, 2020 (as amended, the “2020 Aspire Purchase Agreement”), with Aspire Capital Fund, LLC (“Aspire Capital”) under which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Aspire Capital to purchase up to an aggregate ofpurchased $30.0 million of shares of our common stock over the 30-month term of the 2020 Aspire Purchase Agreement.stock. The 2020 Aspire Purchase Agreement, which we describe in more detail in Note 14, terminated and replaced the common stock purchase agreement we had entered into with Aspire Capital on March 29, 2019 (the “2019 Aspire Purchase Agreement”).
Concurrently with entering into the 2020 Aspire Purchase Agreement, we also entered into a registration rights agreement with Aspire Capital, in which we agreed to file with the Securities and Exchange Commission (the “SEC”) one or more
registration statements, as necessary, and to the extent permissible and subject to certain exceptions, to register under the
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| 5 | Financial Statement Index |
Securities Act of 1933, as amended, the sale of the shares of our common stock that may be issued to Aspire Capital under the 2020 Aspire Purchase Agreement. We have filed with the SEC a prospectus supplement to our effective shelf Registration Statement on Form S-3 (File No. 333-225448) registering all of the shares of common stock that may be offered to Aspire Capital from time to time under the 2020 Aspire Purchase Agreement.
As of March 31,June 30, 2020, we have issued to Aspire Capital a total of 11,007,72644,227,890 shares of our common stock under the 2020 Aspire Purchase Agreement. During the threesix months ended March 31,June 30, 2020, we issued a total of 15,018,72948,238,893 shares of our common stock to Aspire Capital under the 2019 Aspire Purchase Agreement and the 2020 Aspire Purchase Agreement in exchange for approximately $4.6$32.0 million plus Aspire Capital’s commitment to participate in the 2020 Aspire Purchase Agreement.
We are a party to a financing agreement dated as of September 24, 2015 (as amended, the “Financing Agreement”) with certain of our subsidiaries as borrowers (together with Remark, the “Borrowers”), certain of our subsidiaries as guarantors (the “Guarantors”), the lenders from time to time party thereto (the “Lenders”) and MGG Investment Group LP (“MGG”), in its capacity as collateral agent and administrative agent for the Lenders, pursuant to which the Lenders extended credit to the Borrowers consisting of a term loan in the aggregate principal amount of $35.5 million (the “Loan”). The terms of the Financing Agreement, the amendments thereto, and related documents effective as of March 31, 2020 are described in Note 12, which also describes our ongoing events of default relating to our failure to make certain required payments under the Financing Agreement as well as certain other ongoing events of default.
Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities in conjunction with the ongoing events of default under the Financing Agreement, 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 in our Technology and Data Intelligence segment, 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 and potential sales of investment assets or operating businesses.
Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (in particular, in response to the COVID-19 pandemic), 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, cash equivalents and cash resources, and based on the probable success of one or more of the following plans:
•develop and grow new product line(s)
•monetize existing assets
•obtain additional capital through debt and/or equity issuances, including but not limited to equity issuances to Aspire Capital under its existing purchase commitment (which equity issuances may significantly dilute existing stockholders).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 July 6,August 14, 2021.
Comparability
For the quarter ended March 31, 2019, we have adjusted the presentation of the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss as well as for the Unaudited Condensed Consolidated Statement of Cash Flows to reflect the operations of our former Travel and Entertainment segment as discontinued, so that such presentation is consistent with the 2020 presentation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of March 31,June 30, 2020, with the audited Consolidated Balance Sheet amounts as of December 31, 2019 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. generally accepted accounting principles (“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 March 31,June 30, 2020, as well as our unaudited Condensed Consolidated Statements of
| | | | | | | | |
| 6 | Financial Statement Index |
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 (the “2019 Form 10-K”).
Consolidation
We include all of our subsidiaries, which include the variable-interest entities (“VIEs”) for which we are the primary beneficiary, in our condensed consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.
To comply with China’s laws which restrict foreign ownership of entities that operate within industries deemed sensitive by the Chinese government, we employ what we believe is a commonly-used organizational structure consisting of a wholly-foreign owned enterprise (“WFOE”) and the VIEs to operate our KanKan business. We own 100% of the equity of the WFOE, while the VIEs are companies formed in China under local laws which are owned by members of our management team. We funded the registered capital and operating expenses of the VIEs by extending loans to the VIEs’ owners. We are the primary beneficiary of the VIEs because the relationships between the VIEs and our WFOE are governed by contractual agreements, including in each case an Exclusive Call Option Agreement, an Exclusive Business Cooperation Agreement, a Proxy Agreement and an Equity Pledge Agreement, which give us control over the operations of the VIEs.
We use the fair value method to account for equity investments in which we cannot exercise significant influence over the investee, such as with our investment in Sharecare, Inc. (“Sharecare”). With regard to our investment in Sharecare, GAAP allows us to continue to carry our investment at cost less impairment until such time as an observable price change in the underlying security occurs. Any gains or losses resulting from a change in fair value are recorded to the statement of operations. We use the equity method for equity investments in which we can exercise significant influence over the investee, such as our investment in Beijing All-in-one Cloud Net Technology, Co. Ltd. (“AIO”) (see Note 6 for information on our investments in unconsolidated affiliates).
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, intangible assets, the useful lives of property and equipment, stock-basedshare-based compensation, the fair value of the warrant liability, income taxes, inventory reserve and purchase price allocation, among other items.
As of March 31,June 30, 2020, 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.
Recently Issued Accounting Pronouncements
We have reviewed all recently issued accounting pronouncements. The pronouncements that we have already adopted, did not have a material effect on our financial condition, results of operations, cash flows or reporting thereof, we do not believe that any of the 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. REVENUE
During the three months ended June 30, 2020, we began selling our thermal imaging products, primarily in the U.S., under our bio-safety business.
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We sell our Remark AI Thermal Kits to customers needing the ability to scan crowds and areas of high foot traffic for indications that certain persons with elevated temperatures may require secondary screening. Though the kits are semi-customizable, they generally consist primarily of a thermal imaging camera, a calibrating device, a computer to monitor the video feed, supporting equipment and our AI software. Once set up and calibrated, the kits scan a large number of people each minute, providing both thermally enhanced and standard video feeds that allow our customers to evaluate high volumes of people at large gatherings.
Our Remark AI rPad thermal imaging devices, usually mounted on a wall or a single-post stand, are designed for customers needing the ability to scan individuals on a one-by-one basis in situations where rapid, high-volume scanning is not requirednecessary, such as at a customer’s office entrances where employees can be scanned as they enter for indications of an elevated temperature that may require secondary screening. In addition to thermal scanning, we can customize our AI software embedded in the rPad to perform additional safety and security functions including identifying persons for authorized entry.
We have also developed the Remark AI Thermal Helmet which can, for example, be worn by security personnel at large gatherings allowing for a mobile thermal scanning ability.
In addition to our kits, pads and helmets, we sell extended warranties and also maintenance and support plans. Under our warranties and our maintenance and support plans, we stand-ready over the period specified in the contract to repair the hardware sold to the customer or provide support for or upgrade the software as new versions are released.
For our kits, pads and helmets, we recognize the associated revenue at the point in time that the customer takes control of the product, while we recognize revenue related to our warranties and our maintenance and support plans over the period of time we have agreed to stand ready to perform the obligations related to such warranties or plans.
We do not include disclosures related to remaining performance obligations because substantially all of our contracts with customers have an original expected duration of one year or less.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 major category (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| | | | | | | |
AI-based products and services | $ | 2,053 | | | $ | 2,466 | | | $ | 2,377 | | | $ | 2,890 | |
Advertising and other | 246 | | | 399 | | | 353 | | | 1,184 | |
Revenue | $ | 2,299 | | | $ | 2,865 | | | $ | 2,730 | | | $ | 4,074 | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
AI-based products and services | $ | 324 |
| | $ | 425 |
|
Advertising and other | 107 |
| | 784 |
|
Revenue | $ | 431 |
| | $ | 1,209 |
|
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.
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| 8 | Financial Statement Index |
Contract Assets and Contract Liabilities
We do not currently generate material contract assets. During the threesix months ended March 31,June 30, 2020, our contract liability changed only as a result of routine business activity.
During the threesix months ended March 31,June 30, 2020 and 2019, we did 0t recognize material amounts of revenue which were included in the beginning balance of Contract liability at January 1, 2020 while we recognized $0.1 million of revenue during the three months ended March 31,and 2019, which was included in the beginning balance of Contract liability at January 1, 2019.respectively.
During the threesix months ended March 31,June 30, 2020 and 2019, we did not0t recognize revenue from performance obligations within the scope of ASC 606 that were satisfied in previous periods.
NOTE 4. FAIR VALUE MEASUREMENTS
Liabilities Related to Warrants to Purchase Common Stock
At the end of each reporting period, we use the Monte Carlo Simulation model to estimate and report the fair value of liabilities related to certain outstanding warrants to purchase common stock. As of March 31,June 30, 2020, our outstanding liability-classified warrants include the warrants we issued or that we are obligated to issue as part of the consideration for our acquisition (the “CBG Acquisition”) of assets of China Branding Group Limited (“CBG”) in September 2016 (the “CBG Acquisition Warrants”) and warrants we issued as a result of an amendment to the Financing Agreement (as defined in Note 12) related to the acquisition (the “CBG Financing Warrants”).
The following table presents the quantitative inputs, which we classify in Level 3 of the fair value hierarchy, used in estimating the fair value of the warrants:
| | | | | | | | | | | |
| June 30, | | December 31, |
| 2020 | | 2019 |
| | | |
| | | |
CBG Financing Warrants | | | |
Expected volatility | 85.00 | % | | 85.00 | % |
Risk-free interest rate | 0.18 | % | | 1.60 | % |
Expected remaining term (years) | 0.23 | | 0.73 |
CBG Acquisition Warrants | | | |
Expected volatility | 75.00 | % | | 75.00 | % |
Risk-free interest rate | 0.23 | % | | 1.65 | % |
Expected remaining term (years) | 3.23 | | 3.72 |
|
| | | | | |
| March 31, | | December 31, |
| 2020 | | 2019 |
CBG Financing Warrants | | | |
Expected volatility | 85.00 | % | | 85.00 | % |
Risk-free interest rate | 0.33 | % | | 1.60 | % |
Expected remaining term (years) | 0.48 |
| | 0.73 |
|
CBG Acquisition Warrants | | | |
Expected volatility | 75.00 | % | | 75.00 | % |
Risk-free interest rate | 0.52 | % | | 1.65 | % |
Expected remaining term (years) | 3.48 |
| | 3.72 |
|
In addition to the quantitative assumptions above, we also consider whether we would issue additional equity and, if so, the price per share of such equity. At March 31,June 30, 2020, we estimated that 1 future0 equity financing eventevents would potentially occur within the subsequent twelve months.
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| 9 | Financial Statement Index |
Our estimate of expected volatility and our stock price tend to have the most significant impact on the estimated fair value of the CBG Financing Warrants and the CBG Acquisition Warrants. We determined that, for the three months ended March 31,June 30, 2020, adding or subtracting five percentage points with regard to our estimate of expected volatility, or increases or decreases in our stock price of five percent, would not have resulted in changes to our estimates of fair value, except as follows:
|
| | | | | |
| Increase | | Decrease |
Change in volatility | | | |
CBG Acquisition Warrants | — |
| | 58 |
|
| | | | | | | | | | | |
| Increase | | Decrease |
Change in volatility | | | |
CBG Financing Warrants | $ | 130 | | | $ | 130 | |
CBG Acquisition Warrants | 460 | | | 405 | |
| | | |
Change in stock price | | | |
CBG Financing Warrants | $ | 660 | | | $ | 595 | |
CBG Acquisition Warrants | 290 | | | 230 | |
The following table presents the change in the liability balance associated with our liability-classified warrants (in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, | | Year Ended December 31, |
| 2020 | | 2019 |
Balance at beginning of period | $ | 115 | | | $ | 1,383 | |
| | | |
| | | |
Increase (decrease) in fair value | 6,203 | | | (1,268) | |
Balance at end of period | $ | 6,318 | | | $ | 115 | |
|
| | | | | | | |
| Three Months Ended March 31, | | Year Ended December 31, |
| 2020 | | 2019 |
Balance at beginning of period | $ | 115 |
| | $ | 1,383 |
|
Decrease in fair value | (57 | ) | | (1,268 | ) |
Balance at end of period | $ | 58 |
| | $ | 115 |
|
Contingent Consideration Issued in Business Acquisition
We used the discounted cash flow valuation technique to estimate the fair value of the liability related to certain cash payments stipulated in our acquisition of Vegas.com, LLC (“Vegas.com”) in September 2015 that were contingent upon the performance of Vegas.com in the years ended December 31, 2016, 2017, and 2018 (the “Earnout Payments”). The significant unobservable inputs that we used, which we classify in Level 3 of the fair value hierarchy, were projected earnings before interest, taxes, depreciation and amortization (“EBITDA”), the probability of achieving certain amounts of EBITDA, and the rate used to discount the liability.
The following table presents the change during the threesix months ended March 31,June 30, 2020 in the balance of the liability associated with the Earnout Payments (in thousands):
| | | | | |
Balance at beginning of period | $ | 1,086 | |
| |
| |
Interest accrued on unpaid balance | 34 | |
Balance at end of period | $ | 1,120 | |
|
| | | |
Balance at beginning of period | $ | 1,086 |
|
Interest accrued on unpaid balance | 17 |
|
Balance at end of period | $ | 1,103 |
|
On the Condensed Consolidated Balance Sheets, we included the liability for contingent consideration as a component of Accrued expense and other current liabilities.
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| 10 | Financial Statement Index |
NOTE 5. TRADE ACCOUNTS RECEIVABLE
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | June 30, 2020 | | December 31, 2019 |
Gross accounts receivable balance | | | | | | | | | $ | 4,465 | | | $ | 4,171 | |
Allowance for bad debt | | | | | | | | | (2,230) | | | (2,207) | |
Accounts receivable, net | | | | | | | | | $ | 2,235 | | | $ | 1,964 | |
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Gross accounts receivable balance | $ | 3,762 |
| | $ | 4,171 |
|
Allowance for bad debt | (2,222 | ) | | (2,207 | ) |
Accounts receivable, net | $ | 1,540 |
| | $ | 1,964 |
|
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-based AI projects (exclusive of certain financial technology (“FinTech”) services we provided) represent 63%55% of our gross trade receivables. Substantially allMost of our remaining gross trade receivables balance resulted from the FinTech service, which we have discontinued.
NOTE 6. INVESTMENT IN UNCONSOLIDATED AFFILIATES
In 2009, we co-founded a U.S.-based venture, Sharecare, to build a web-based platform that simplifies the search for health and wellness information. The other co-founders of Sharecare were Dr. Mehmet Oz, HARPO Productions, Discovery Communications, Jeff Arnold and Sony Pictures Television. As of March 31,June 30, 2020, we owned approximately 4.6%4.5% of Sharecare’s issued stock and maintained representation on its Board of Directors.
During June 2018, 1 of our consolidated VIEs acquired a 20% interest in AIO, a Chinese technology company which provides consulting and data services to the Chinese film industry, in exchange for $1.0 million, a portion of which was paid as of March 31,June 30, 2020, and a license to use our proprietary KanKan data intelligence platform in China. Based on our evaluation of the facts and circumstances related to the transaction, we determined that we will account for such transaction using the equity method of accounting. We recognize our equity in the net earnings or losses relating to AIO on a one-quarter reporting lag in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. For the three months ended March 31,June 30, 2020, the amount of our equity in AIO’s net earnings for their quarter ended DecemberMarch 31, 20192020 was not material.
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, 2020 | | December 31, 2019 |
Other receivables | $ | 3,608 | | | $ | 3,712 | |
Prepaid expense | 448 | | | 633 | |
Deposits | 10 | | | 7 | |
Inventory, net | 1,355 | | | — | |
Other current assets | 382 | | | 271 | |
Total | $ | 5,803 | | | $ | 4,623 | |
| | | |
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Other receivables | $ | 3,679 |
| | $ | 3,712 |
|
Prepaid expense | 649 |
| | 633 |
|
Deposits | 12 |
| | 7 |
|
Other current assets | 277 |
| | 271 |
|
Total | $ | 4,617 |
| | $ | 4,623 |
|
| | | |
| | | | | | | | |
| 11 | Financial Statement Index |
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands, except estimated lives):
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| Estimated Life (Years) | | June 30, 2020 | | December 31, 2019 |
Computers and equipment | 3 | | 987 | | | 989 | |
Furniture and fixtures | 3 | | 47 | | | 23 | |
Software | 3 | | 4,872 | | | 4,896 | |
| | | | | |
Leasehold improvements | 10 | | 11 | | | 114 | |
Total property, equipment and software | | | $ | 5,917 | | | $ | 6,022 | |
Less accumulated depreciation | | | (5,761) | | | (5,681) | |
Total property, equipment and software, net | | | $ | 156 | | | $ | 341 | |
|
| | | | | | | | | |
| Estimated Life (Years) | | March 31, 2020 | | December 31, 2019 |
Computers and equipment | 3 | | 987 |
| | 989 |
|
Furniture and fixtures | 3 | | 23 |
| | 23 |
|
Software | 3 | | 4,867 |
| | 4,896 |
|
Leasehold improvements | 10 | | 11 |
| | 114 |
|
Total property, equipment and software | | | $ | 5,888 |
| | $ | 6,022 |
|
Less accumulated depreciation | | | (5,708 | ) | | (5,681 | ) |
Total property, equipment and software, net | | | $ | 180 |
| | $ | 341 |
|
For the threesix months ended March 31,June 30, 2020 and 2019, depreciation (and amortization of software) expense was $0.1 million and $0.2$0.4 million, respectively.
NOTE 9. LEASES
We lease office space and equipmenta vehicle under contracts we classify as operating leases. None of our leases are financing leases. As of March 31, 2020, the current portion of our operating lease liability was $0.3 million and was reported in Accrued expense and other current liabilities on our unaudited Condensed Consolidated Balance Sheet.
The following table presents the detail of our lease expense, net of sublease income, which is reported in General and administrative expense (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | | | |
Operating lease expense | $ | 83 | | | $ | 385 | | | $ | 471 | | | $ | 703 | | | | | |
Short-term lease expense | 47 | | | 98 | | | 122 | | | 164 | | | | | |
Less: Sublease income | — | | | (78) | | | — | | | (78) | | | | | |
Lease expense | $ | 130 | | | $ | 405 | | | $ | 593 | | | $ | 789 | | | | | |
|
| | | | | | | |
| Three Months Ended |
| 2020 | | 2019 |
Operating lease expense | $ | 394 |
| | $ | 318 |
|
Short-term lease expense | 75 |
| | 66 |
|
Lease expense | $ | 469 |
| | $ | 384 |
|
We reported within continuing operating cash flows for the threesix months ended March 31,June 30, 2020 and 2019, de minimis amounts$0.1 million and $0.1$0.9 million, respectively, of cash paid for amounts included in the measurement of operating lease liabilities.
As of March 31,June 30, 2020, our operating leases had a weighted-average remaining lease term of approximately 1614 months, and we used a weighted-average discount rate of 12%approximately 13% to measure our operating lease liabilities.
| | | | | | | | |
| 12 | Financial Statement Index |
Maturity of Lease Liabilities
The following table presents information regarding the maturities of our undiscounted remaining operating lease payments, with a reconciliation to the amount of the liabilities representing such payments as presented in our March 31,June 30, 2020 unaudited Condensed Consolidated Balance Sheet (in thousands):
| | | | | |
Operating lease liabilities maturing during the next: | |
One year | $ | 387 | |
Two years | 149 | |
Three years | 76 | |
| |
| |
| |
Total undiscounted cash flows | $ | 612 | |
Present value of cash flows | $ | 548 | |
| |
Lease liabilities on balance sheet: | |
Short-term | $ | 346 | |
Long-term | 202 | |
Total lease liabilities | $ | 548 | |
| |
|
| | | |
Operating lease liabilities maturing during the next: | |
One year | $ | 337 |
|
Two years | 84 |
|
Total undiscounted cash flows | $ | 421 |
|
Present value of cash flows | $ | 395 |
|
| |
Lease liabilities on balance sheet: | |
Short-term | $ | 316 |
|
Long-term | 79 |
|
Total lease liabilities | $ | 395 |
|
The current portion of our operating lease liability, which we report in Accrued expense and other current liabilities on our unaudited Condensed Consolidated Balance Sheet, also includes approximately $1.5 million of estimated damages from the early termination of the lease on our former office located at 3960 Howard Hughes Parkway in Las Vegas. See Note 13 and Note 18 for more information.
Significant Judgments
When accounting for our leases, we make certain judgments, such as whether a contract contains a lease or what discount rate to use, that affect the determination of the amount of our lease assets and liabilities. Based on the current facts and circumstances related to our contracts, none of the judgments we make involve an elevated degree of qualitative significance or complexity such that further disclosure is warranted.
| | | | | | | | |
| 13 | Financial Statement Index |
NOTE 10. INTANGIBLE ASSETS
The following table summarizes intangible assets by category (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | December 31, 2019 | | | | |
| Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
Finite-lived intangible assets | | | | | | | | | | | |
Domain names | $ | 1,256 | | | $ | (911) | | | $ | 345 | | | $ | 1,256 | | | $ | (874) | | | $ | 382 | |
| | | | | | | | | | | |
Other intangible assets | 68 | | | (68) | | | — | | | 68 | | | (68) | | | — | |
| $ | 1,324 | | | $ | (979) | | | $ | 345 | | | $ | 1,324 | | | $ | (942) | | | $ | 382 | |
Indefinite-lived intangible assets | | | | | | | | | | | |
License to operate in China | 127 | | | | | 127 | | | 127 | | | | | 127 | |
Total intangible assets | $ | 1,451 | | | | | $ | 472 | | | $ | 1,451 | | | | | $ | 509 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
Finite-lived intangible assets | | | | | | | | | | | |
Domain names | $ | 1,256 |
| | $ | (893 | ) | | $ | 363 |
| | $ | 1,256 |
| | $ | (874 | ) | | $ | 382 |
|
Other intangible assets | 68 |
| | (68 | ) | | — |
| | 68 |
| | (68 | ) | | — |
|
| $ | 1,324 |
| | $ | (961 | ) | | $ | 363 |
| | $ | 1,324 |
| | $ | (942 | ) | | $ | 382 |
|
Indefinite-lived intangible assets | | | | | | | | | | | |
License to operate in China | 127 |
| |
| | 127 |
| | 127 |
| |
| | 127 |
|
Total intangible assets | $ | 1,451 |
| |
| | $ | 490 |
| | $ | 1,451 |
| |
| | $ | 509 |
|
Total amortization expense was de minimis and $0.1$0.2 million for the threesix months ended March 31,June 30, 2020 and 2019, respectively.
NOTE 11. INCOME TAX
Our effective tax rate (“ETR”) from continuing operations was 0.0% for the threesix months ended March 31,June 30, 2020. The quarterly ETR has not significantly differed from our historical annual ETR because we continue to maintain a full valuation allowance against our existing deferred tax assets.
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary change to income and non-income-based tax laws. As of March 31,June 30, 2020, we do not currently expect the provisions of the CARES Act to have a material effect on current income tax expense or the realizability of deferred income tax assets. We will monitor additional guidance and impact that the CARES Act and other potential legislation may have on our income taxestaxes.
NOTE 12. DEBT
Short-Term Debt
On April 12, 2017, we issued a short-term note payable in the principal amount of $3.0 million to a private lender in exchange for cash in the same amount. The agreement, which does not have a stated interest rate, required us to repay the note plus a fee of $115 thousand on the maturity date of June 30, 2017. The note is accruing interest at $500 per day on the unpaid principal until we repay the note in full. As of March 31,June 30, 2020, we owe $3.3$2.4 million in principal and accrued interest.
Other Debt
The following table presents debt (in thousands) as of:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
MGG loan due May 2020 | $ | — | | | $ | 12,025 | |
Loans payable, current | — | | | 12,025 | |
| | | |
PPP loan due April 2022 | 425 | | | — | |
Loans payable, long-term | $ | 425 | | | $ | — | |
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Loan due May 2020 | $ | 11,931 |
| | $ | 12,025 |
|
Loan due May 2020
On September 24, 2015, we entered into the Financing Agreement, pursuant to which the Lenders provided us with the $27.5 million Loan.
We entered into Amendment No. 1 to Financing Agreement on September 20, 2016 which, among other changes, increased the Loan by $8.0 millionwere a party to a total aggregate principal amount of $35.5 million. As of March 31, 2020, after amendments and other events described below, the Loan bore interest at three-month LIBOR (with a floor of 2%) plus 11% per annum, payable monthly, and had a maturity date of May 15, 2020. As of March 31, 2020, the applicable interest rate on the Loan was approximately 13% per annum.
In connection with the Financing Agreement, we also entered into a securityfinancing agreement dated as of September 24, 2015 (the “Security(as amended, the “Financing Agreement”) with certain of our subsidiaries as borrowers (together with Remark, the other Borrowers“Borrowers”), certain of our subsidiaries as guarantors, the lenders from time to time party thereto (the “Lenders”) and the Guarantors for the benefit of MGG Investment Group LP, in its capacity as collateral agent and administrative agent for the Secured Parties referred to therein, to secure the obligations of the Borrowers and the Guarantors under the Financing Agreement. The Security Agreement provided for a first-priority lien on, and security interest in, all assets of Remark and our subsidiaries, subject to certain exceptions.
On April 30, 2018, we entered into Amendment No. 4 and Waiver to Financing Agreement (the “Fourth Financing Amendment”Lenders (“MGG”), which provided for, among other things, (i) a reduction in the interest rate on the remaining amount outstanding under the Financing Agreement to three-month LIBOR plus 8.5% per annum, (ii) an extension of the maturity date under the Financing Agreement to September 30, 2020, (iii) a modification of certain of our covenants under the Financing Agreement, including covenants regarding capital expenditures, minimum value of certain of our assets, consolidated EBITDA of Vegas.com and its subsidiaries, and revenue generated by KanKan, (iv) an increase in the amount we are permitted to invest in our non-U.S. subsidiaries operating our KanKan business, (v) a waiver by the Lenders of certain events of default under the Financing Agreement, and (vi) prepayment by the Borrowers of $8.0 million principal amount outstanding and $3.5 million of exit fees under the Financing Agreement within 60 days following the date of the Fourth Financing Amendment. In consideration for the Lenders’ entry into the Fourth Financing Amendment, we also paid a closing fee of approximately $413 thousand.
Effective as of June 29, 2018, we entered into Amendment No. 5 and Waiver to Financing Agreement (the “Fifth Financing Amendment”) pursuant to which the Lenders agreed, among other things,extended credit to extend the due dateBorrowers consisting of a term loan in the prepayments required by the Fourth Financing Amendment for up to three months, provided that we made extension payments on the first business day of each such month. The extension payments were $250,000 for each of the first two months and $500,000 for the third month, with the final extension period ending on September 28, 2018. We made the extension payments required by the Fifth Financing Amendment to extend the due date of the prepayments required by the Fourth Financing Amendment to September 28, 2018; however, we failed to prepay the $8.0 millionaggregate principal amount and $3.5of $35.5 million of exit fees due on such date. Such failure to make the required payments constituted an event of default under the Financing Agreement and as a result, from September 28, 2018, the Loan bore interest at three-month LIBOR plus 11.0%, the default interest rate.(the “MGG Loan”).
On May 15, 2019, we completed the sale of all of the issued and outstanding membership interests of Vegas.com LLC (the “VDC Transaction”) and used the cash proceeds of $30 million to pay amounts due under the Financing Agreement, of which approximately $10 million remained outstanding after giving effect to the application of such cash proceeds.
On the same date, in connection with the closing of the VDC Transaction,May 28, 2020, we entered into Amendment No. 6 and Waiver to Financing Agreement (the “Sixth Financing Amendment”), pursuant to which, among other things, (i) the Lenders waived all events of default under the Financing Agreement existing as of the date of the Sixth Financing Amendment, (ii) MGG released any and all liens in the equity interests of Vegas.com and its subsidiaries and their assets and properties, (iii) the Borrowers could add the amount of any accrued and unpaid interest to the outstanding principal amount of the Loan, (iv) the remaining principal amount outstanding under the Financing Agreement accrued interest at a rate equal to the three-month LIBOR (with a floor of 2%) plus 8.5% per annum, (v) the continuing Loan had a maturity date of May 15, 2020, (vi) covenants with respect to capital
expenditures and revenue generated by our KanKan business were eliminated and covenants regarding the minimum value of certain of our assets, our minimum liquidity and the amount we were permitted to invest in our non-U.S. subsidiaries were modified, and (vii) we were required to commence a sale process with respect to our equity in Sharecare within five business days of the effective date of the Sixth Financing Amendment, and to use the net cash proceeds of such sale to payrepaid in full ourall outstanding obligations under, the Financing Agreement the (“Sharecare Covenant”).
The Financing Agreement contained certain affirmative and negative covenants. As of March 31, 2020, we were not in compliance with certain of such covenants under the Financing Agreement, including a covenant requiring us to obtain and pay for a tail directors’ and officers’ liability insurance policy (the “Tail Policy”) by June 4, 2019 in connection with the VDC Transaction, and a covenant requiring us to make the final Earnout Payment by June 14, 2019. Additionally, although we have actively taken steps to monetize our ownership interest in Sharecare, we did not comply with certain procedural requirements stipulated by the Sharecare Covenant. Our non-compliance with such covenants constituted events of default under the Financing Agreement. In addition, in June 2019, the Lenders paid the $1.1 million of premium under the Tail Policy on our behalf and such amount was added to the amount of principal due underterminated, the Financing Agreement. See Note 13 for further discussion of LendorLender actions.
On April 15, 2020, we entered into a loan agreement (the “PPP Loan”) with our bank under the U.S. Small Business Administration’s Paycheck Protection Program. Under the PPP Loan, we borrowed $0.4 million with a stated interest rate of 1 percent for a term of two years from the initial disbursement date of April 15, 2020. The PPP Loan is eligible for forgiveness as part of the CARES Act if certain requirements are met. We continue to evaluate and monitor the requirements of the CARES Act that allow for forgiveness. The accrued interest expense relating these loans for three and six months ended June 30, 2020 was not material. As of June 30, 2020, the SBA loan had an outstanding principle balance of $0.4 million included in loans payable.
NOTE 13. COMMITMENTS AND CONTINGENCIES
At March 31,June 30, 2020, we had no material commitments outside the normal course of business.
Contingencies
As of March 31,June 30, 2020, 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, except as described below.
| | | | | | | | |
| 15 | Financial Statement Index |
Earnout Payment
As of March 31,June 30, 2020 and December 31, 2019, we have accrued approximately $1.1 million related to the Earnout Payment related to our acquisition of Vegas.com. See Note 4 for more information regarding the Earnout Payment.
Termination of Lease and Related Landlord Actions
Since approximately July 2019, we have not been able to pay our obligations under the office lease for our former office located at 3960 Howard Hughes Parkway.Parkway in Las Vegas, Nevada. On March 5, 2020, theour former landlord, BRE/HC Las Vegas Property Holdings, L.L.C (the “Hughes Center Landlord”), exercised its right to terminate the lease as of such date as a result of the ongoing payment default.
On April 9, 2020, the landlordHughes Center Landlord filed suit against us in Nevada to recover the approximately $1.1 million of rent owed through March 5, 2020, plus damages resulting from the early termination of the lease. Based on calculations stipulated by the lease, we estimated the increase to rent expense and to the current portion of our operating lease liability, net of security deposit of $0.3 million, was approximately $1.5 million as of March 31, 2020; this amount is subjectJune 30, 2020.
On August 3, 2020, we entered into a Settlement Agreement and Release (the “Hughes Center Lease Settlement”) with the Hughes Center Landlord under which we will pay $0.6 million to change based upon future events.the Hughes Center Landlord in exchange for a full release of all obligations and claims against us in relation to our lease agreement with the Hughes Center Landlord. See Note 18 for more information regarding the Hughes Center Lease Settlement.
We have leased new office space under a lease that is not material to our consolidated financial statements.
Lender Actions and Repayment of Debt
On January 8, 2020, we received a notice from MGG that, as a result of certain continuing defaults under the Financing Agreement, the Lenders had exercised their right under the Financing Agreement to replace the single-member board of directors of our wholly-owned subsidiary that holds our investment (described in Note 6) in Sharecare with a person of their choosing.
On March 16, 2020, we received a notice of acceleration from MGG, in which MGG declared that the entire unpaid principal of and any accrued and unpaid interest on the MGG Loan, and all fees and other amounts payable under the Financing Agreement, arewere immediately due and payable and demanded that all such amounts be paid immediately to MGG.
On March 16, 2020, MGG filed a Summons with Notice against us in the Supreme Court of the State of New York, County of New York, alleging a claim for breach of contract under the Financing Agreement.
On May 28, 2020, we repaid in full all outstanding obligations under, and terminated, the Financing Agreement. As a result, we believe that there are no grounds for MGG’s lawsuit against us to continue. On the same date, and concurrently with repaying all outstanding obligations under the Financing Agreement, we agreed to reduce by $0.30 per share the exercise price of the CBG Financing Warrants to purchase 6,601,558 shares of our common stock.
On June 23, 2020, MGG voluntarily discontinued the legal action against us in the Supreme Court of the State of New York, County of New York.
| | | | | | | | |
| 16 | Financial Statement Index |
NOTE 14. STOCKHOLDERS' EQUITY, STOCK-BASEDSHARE-BASED COMPENSATION AND NET LOSS PER SHARE
Common Shares Authorized
Our Amended and Restated Certificate of Incorporation authorizes us to issue up to 100,000,000 shares of our common stock, of which 99,408,916 shares were outstanding as of August 11, 2020. In addition, as of August 11, 2020, we had outstanding stock options allowing for the purchase of as many as approximately 15.9 million shares of common stock and we had outstanding warrants to purchase 6,641,558 shares of common stock. If all of our outstanding stock options and warrants were exercised, the total number of shares of our common stock that we would be required to issue would greatly exceed the number of our remaining authorized but unissued shares of common stock.
As a result of such potential shortfall in the number of our authorized shares of common stock, we will have insufficient shares of common stock available to issue in connection with the exercise of our outstanding stock options and warrants or any future equity financing transaction we may seek to undertake. Accordingly, we intend to seek approval of an increase in the number of our authorized shares of common stock at a 2020 special meeting of stockholders.
Equity Issuances
On March 3, 2020, we entered into the 2020 Aspire Purchase Agreement with Aspire Capital which providesprovided that, upon the terms and subject to the conditions and limitations set forth therein, we havehad the right to direct Aspire Capital to purchase up to an aggregate of $30.0 million of shares of our common stock over the 30-month term of the 2020 Aspire Purchase Agreement. The 2020 Aspire Purchase Agreement replaced the 2019 Aspire Purchase Agreement, which terminated under the terms of the 2020 Aspire Purchase Agreement. In consideration for entering into the 2020 Aspire Purchase Agreement, we have issued to Aspire Capital 2,374,545 shares of our common stock.
Under the 2020 Aspire Purchase Agreement, on any trading day selected by us over the 30-month term of the 2020 Aspire Purchase Agreement, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”) directing Aspire Capital to purchase up to 250,000 shares of our common stock per trading day, up to an aggregate of $30.0 million of our common stock, at a per share price equal to the lesser of (i) the lowest sale price of our common stock on the purchase date or (ii) the arithmetic average of the three lowest closing sale prices for our common stock during the 10 consecutive trading days ending on the trading day immediately preceding the purchase date.
The aggregate purchase price payable by Aspire Capital on any one purchase date may not exceed $500,000, unless otherwise mutually agreed. The parties may mutually agree to increase the number of shares of our common stock that may be purchased per trading day pursuant to the terms of the 2020 Aspire Purchase Agreement to an additional 2,000,000 shares.
In addition, on any trading day on which we submit a Purchase Notice to Aspire Capital to purchase at least 250,000 shares, we also have the right, in our sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of our common stock equal to up to 30% of the aggregate shares of our common stock traded on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares we may determine, and a minimum purchase price threshold equal to the greater of (i) 80% of the closing price of our common stock on the trading day immediately preceding the VWAP Purchase Date or (ii) a higher price that may be determined by us. The purchase price per share pursuant to such VWAP Purchase Notice will be equal to the lesser of (i) the closing sale price of our common stock on the VWAP Purchase Date, or (ii) 97% of the volume-weighted average price for our common stock traded on its principal market on the VWAP Purchase Date.
We may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the 2020 Aspire Purchase Agreement, so long as the most recent purchase has been completed.
In addition, Aspire Capital 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 $0.25. There are no trading volume requirements or restrictions under the 2020 Aspire Purchase Agreement, and we will control the timing and amount of sales of our common stock to Aspire Capital. Aspire Capital has no right to require any sales by us, but is obligated to make purchases from us as directed by us in accordance with the 2020 Aspire Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the 2020 Aspire Purchase Agreement. The 2020 Aspire Purchase Agreement may be terminated by us at any time, at our discretion, without any cost to us. Aspire Capital 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 2020 Aspire Purchase Agreement.
The 2020 Aspire Purchase Agreement provides that the total number of shares that may be issued pursuant to such agreement is limited to 11,007,726 shares (the “Exchange Cap”), or 19.99% of our shares of common stock outstanding as of the date of the 2020 Aspire Purchase Agreement, unless stockholder approval is obtained in accordance with the rules of the Nasdaq Stock Market. If stockholder approval is not obtained, such limitation will not apply after the Exchange Cap is reached if at all times thereafter the average purchase price paid for all shares issued under the 2020 Aspire Purchase Agreement is equal to or greater than $0.4879 per share. The 2020 Aspire Purchase Agreement also provides that at no time will Aspire Capital (together with its affiliates) beneficially own more than 19.99% of our outstanding shares of common stock. See Note 18 for details regarding and amendment of the 2020 Aspire Purchase Agreement.
As of March 31,June 30, 2020, we have issued to Aspire Capital a total of 11,007,72644,227,890 shares of our common stock under the 2020 Aspire Purchase Agreement. During the threesix months ended March 31,June 30, 2020, we issued a total of 15,018,72948,238,893 shares of our common stock to Aspire Capital under the 2019 Aspire Purchase Agreement and the 2020 Aspire Purchase Agreement in exchange for $4.6$32.0 million plus Aspire Capital’s commitment to participate in the 2020 Aspire Purchase Agreement.
On July 20, 2020, we filed a registration statement on Form S-1 (Registration No. 333-239944) with the SEC (as amended, the “Registration Statement”). The Registration Statement, which has not yet been declared effective by the SEC, relates to an offer (the “Offering”) to sell up to a total of 150,000 units (the “Units”) consisting of 600,000 shares of 9.5% Series A Cumulative Redeemable Perpetual Preferred Stock, par value $0.001 per share (the “Series A Preferred”) and 150,000 warrants to purchase common stock (the “Warrants”, together with the Units and the Series A Preferred, the “Securities”), plus the grant of an over-allotment option for the issuance, sale and delivery of up to 90,000 additional Series A Preferred and/or 22,500 additional Warrants. Each Unit consists of (i) 4 shares of Series A Preferred and (ii) one Warrant which may become exercisable to purchase 1 share of our common stock. The Securities are to be offered and sold in the manner described in the Registration Statement and the related prospectus included therein. We estimate that the net proceeds to us from the sale of the Units in the Offering will be approximately $13.8 million (assuming the over-allotment option is not exercised), based on the public offering price of $100.00 per Unit, after deducting the total underwriting discounts and commissions payable, excluding estimated offering expenses. This amount does not include the proceeds that we may receive in connection with any exercise of the Warrants issued pursuant to the Offering.
Stock-Based
Share-Based Compensation
We are authorized to issue equity-based awards under our 2010 Equity Incentive Plan, our 2014 Incentive Plan, and our 2017 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
| | | | | | | | |
| 17 | Financial Statement Index |
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 March 31,June 30, 2020, and changes during the threesix months then ended:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at January 1, 2020 | 10,359,079 | | | $ | 4.20 | | | | | |
Granted | — | | | — | | | | | |
Exercised | (54,864) | | | 1.23 | | | | | |
Forfeited, cancelled or expired | (87,375) | | | 2.63 | | | | | |
Outstanding at June 30, 2020 | 10,216,840 | | | $ | 4.23 | | | 6.2 | | $ | — | |
Options exercisable at June 30, 2020 | 9,876,966 | | | $ | 4.35 | | | 6.1 | | $ | — | |
|
| | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at January 1, 2020 | 10,359,079 |
| | $ | 4.20 |
| | | | |
Forfeited, cancelled or expired | (68,250 | ) | | 3.07 |
| | | | |
Outstanding at March 31, 2020 | 10,290,829 |
| | $ | 4.21 |
| | 6.5 | | $ | — |
|
Options exercisable at March 31, 2020 | 9,900,705 |
| | $ | 4.35 |
| | 6.4 | | $ | — |
|
The following table summarizes activity under our equity incentive plans related to the China Cash Bonuses as of March 31,June 30, 2020, and changes during the threesix months then ended:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at January 1, 2020 | 1,087,500 | | | $ | 5.20 | | | | | |
| | | | | | | |
| | | | | | | |
Forfeited, cancelled or expired | (183,000) | | | 5.42 | | | | | |
Outstanding at June 30, 2020 | 904,500 | | | $ | 5.16 | | | 5.0 | | $ | — | |
Options exercisable at June 30, 2020 | 882,750 | | | $ | 5.25 | | | 4.9 | | $ | — | |
|
| | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at January 1, 2020 | 1,087,500 |
| | $ | 5.20 |
| | | | |
Forfeited, cancelled or expired | (114,500 | ) | | 5.40 |
| | | | |
Outstanding at March 31, 2020 | 973,000 |
| | $ | 5.18 |
| | 5.3 | | $ | — |
|
Options exercisable at March 31, 2020 | 817,000 |
| | $ | 5.20 |
| | 4.8 | | $ | — |
|
During the threesix months ended March 31,June 30, 2020, we did not award restricted stock under our equity incentive plans.
During the three months ended March 31,June 30, 2020 and 2019, we incurred a de minimis amount of share-based compensation expense.expense (benefit) of $0.6 million and $(0.1) million, respectively. During the six months ended June 30, 2020 and 2019, we incurred share-based compensation expense of $0.7 million and $0.2 million, respectively.
Net Loss per Share
For the three and six months ended March 31,June 30, 2020 and 2019, there were no reconciling items related to either the numerator or denominator of the loss per share calculation.
Securities which would have been anti-dilutive to a calculation of diluted earnings per share for the three and six months ended March 31,June 30, 2020 and 2019 include the outstanding stock options described above; the outstanding CBG Acquisition Warrant, which may be exercised to purchase 40,000 shares of our common stock at a per-share exercise price of $10.00 (we are also committed to the future issuance of additional CBG Acquisition Warrants at the same per-share exercise price as the CBG Acquisition Warrant that has already been issued); and the outstanding CBG Financing Warrants, which may be exercised to purchase 4,896,3136,601,558 shares of our common stock at an exercise price of $3.00$1.93 per share.
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| 18 | Financial Statement Index |
NOTE 15. RELATED PARTY TRANSACTIONS
As of March 31,June 30, 2020, we had outstanding approximately $0.5 million of receivables from related parties. The receivables represent cash advances in excess of expense reimbursements to senior management. The cash to be received from these receivables will bewas subsequently injected as additional capital into our VIEs in China. AsSee Note 18 for more information regarding subsequent payment of July 6, 2020, the funds had not yet been deposited into thethese amounts to our VIEs.
NOTE 16. SEGMENT INFORMATION
As a result of our disposal of the previously-reported Travel and Entertainment segment, we currently report one1 segment: our Technology & Data Intelligence segment, which provides services to our customers based upon the data collected and processed by our proprietary data intelligence software.
Our chief operating decision maker uses Adjusted EBITDA as the primary measure of profitability for evaluating the operational performance of our reportable segment. Adjusted EBITDA represents operating income (loss) plus depreciation and amortization expense, share-based compensation expense, impairments and net other income, less other loss. We do not allocate certain types of shared expense, such as legal and accounting, to our reportable segment; such costs are included in Corporate Entity and Other.
The following table presents certain financial information regarding our reportable segment and other entities for the three and six months ended March 31,June 30, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | |
| Technology & Data Intelligence | | Corporate Entity and Other | | Consolidated |
Three Months Ended June 30, 2020 | | | | | |
Revenue | $ | 987 | | | $ | 1,312 | | | $ | 2,299 | |
Adjusted EBITDA | $ | (782) | | | $ | (1,286) | | | $ | (2,068) | |
Three Months Ended June 30, 2019 | | | | | |
Revenue | $ | 2,465 | | | $ | 400 | | | $ | 2,865 | |
Adjusted EBITDA | $ | (344) | | | $ | (2,310) | | | $ | (2,654) | |
| | | | | |
Six Months Ended June 30, 2020 | | | | | |
Revenue | $ | 1,311 | | | $ | 1,419 | | | $ | 2,730 | |
Adjusted EBITDA | $ | (1,472) | | | $ | (2,491) | | | $ | (3,963) | |
Six Months Ended June 30, 2019 | | | | | |
Revenue | $ | 2,890 | | | $ | 1,184 | | | $ | 4,074 | |
Adjusted EBITDA | $ | (3,003) | | | $ | (4,927) | | | $ | (7,930) | |
| | | | | |
|
| | | | | | | | | | | |
| Technology & Data Intelligence | | Corporate Entity and Other | | Consolidated |
Three Months Ended March 31, 2020 | | | | | |
Revenue | $ | 324 |
| | $ | 107 |
| | $ | 431 |
|
Adjusted EBITDA | $ | (690 | ) | | $ | (1,205 | ) | | $ | (1,895 | ) |
Three Months Ended March 31, 2019 | | | | | |
Revenue | $ | 425 |
| | $ | 784 |
| | $ | 1,209 |
|
Adjusted EBITDA | $ | (2,659 | ) | | $ | (2,617 | ) | | $ | (5,276 | ) |
| | | | | |
| | | | | | | | |
| 19 | Financial Statement Index |
The following table reconciles Adjusted EBITDA to Loss before income taxes (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Adjusted EBITDA | $ | (2,068) | | | $ | (2,654) | | | $ | (3,963) | | | $ | (7,930) | |
Depreciation and amortization | (66) | | | (260) | | | (156) | | | (585) | |
| | | | | | | |
Share-based compensation expense | (646) | | | 102 | | | (681) | | | (223) | |
Other expense (income), net | (58) | | | (92) | | | (57) | | | (47) | |
Other loss (gain) | — | | | (27) | | | (1,465) | | | (1) | |
Operating loss | $ | (2,838) | | | $ | (2,931) | | | $ | (6,322) | | | $ | (8,786) | |
Other income (expense) | | | | | | | |
Interest expense | (775) | | | (553) | | | (1,236) | | | (940) | |
Other income (expense), net | 57 | | | 92 | | | 57 | | | 47 | |
Gain on lease termination | — | | | — | | | 1,538 | | | — | |
Change in fair value of warrant liability | (6,260) | | | 2,078 | | | (6,203) | | | 662 | |
Other gain (loss), net | — | | | 27 | | | (73) | | | 1 | |
Total other income (expense), net | $ | (6,978) | | | $ | 1,644 | | | $ | (5,917) | | | $ | (230) | |
Income (Loss) from continuing operations before income taxes | $ | (9,816) | | | $ | (1,287) | | | $ | (12,239) | | | $ | (9,016) | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Adjusted EBITDA | $ | (1,895 | ) | | $ | (5,276 | ) |
Depreciation and amortization | (90 | ) | | (325 | ) |
Share-based compensation expense | (35 | ) | | (325 | ) |
Other expense (income), net | 1 |
| | 45 |
|
Other loss (gain) | (1,465 | ) | | 26 |
|
Operating loss | $ | (3,484 | ) |
| $ | (5,855 | ) |
Other income (expense) | | | |
Interest expense | (461 | ) | | (387 | ) |
Other income (expense), net | — |
| | (45 | ) |
Gain on lease termination | 1,538 |
| | — |
|
Change in fair value of warrant liability | 57 |
| | (1,416 | ) |
Other gain (loss), net | (73 | ) | | (26 | ) |
Total other income (expense), net | $ | 1,061 |
|
| $ | (1,874 | ) |
Income (Loss) from continuing operations before income taxes | $ | (2,423 | ) |
| $ | (7,729 | ) |
The following table presents total assets for our reportable segment and the corporate and other entities (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Technology & Data Intelligence segment | $ | 8,468 | | | $ | 7,450 | |
Corporate entity and other business units | 14,608 | | | 7,377 | |
Consolidated | $ | 23,076 | | | $ | 14,827 | |
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Technology & Data Intelligence segment | $ | 7,040 |
| | $ | 7,450 |
|
Corporate entity and other business units | 4,956 |
| | 7,377 |
|
Consolidated | $ | 11,996 |
| | $ | 14,827 |
|
Capital expenditures for our Technology & Data Intelligence segment were de minimis during the three and six months ended March 31,June 30, 2020, respectively, and totaledwere de minimis and $0.1 million during the three and six months ended March 31, 2019.June 30, 2019, respectively.
NOTE 17. DISCONTINUED OPERATIONS
On May 15, 2019, we completed the VDC Transaction for an aggregate purchase price of $30.0 million. The business we sold in the VDC Transaction formerly comprised our Travel and Entertainment segment.
| | | | | | | | |
| 20 | Financial Statement Index |
The following table presents the major classes of line items constituting the pretax profit or loss of the disposed Travel and Entertainment segment (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | Six Months Ended |
| | | June 30, 2019 | | | | June 30, 2019 |
Revenue | | | $ | 9,178 | | | | | $ | 27,432 | |
| | | | | | | |
Cost of revenue (excluding depreciation and amortization) | | | 1,240 | | | | | 4,016 | |
Selling, general and administrative | | | 7,506 | | | | | 18,383 | |
Technology and development | | | 1,082 | | | | | 3,280 | |
Depreciation, amortization and impairments | | | 5,860 | | | | | 8,007 | |
Other operating expense | | | 139 | | | | | 384 | |
Other expense (income) and loss (gain), net | | | (4,948) | | | | | (3,814) | |
Loss from discontinued operations before income taxes | | | (1,701) | | | | | (2,824) | |
Benefit from income taxes | | | 214 | | | | | 214 | |
Loss from discontinued operations | | | $ | (1,487) | | | | | $ | (2,610) | |
|
| | | |
| Three Months Ended |
| March 31, 2019 |
Revenue | $ | 18,254 |
|
| |
Cost of revenue (excluding depreciation and amortization) | 2,776 |
|
Selling, general and administrative | 10,877 |
|
Technology and development | 2,198 |
|
Depreciation, amortization and impairments | 2,147 |
|
Other operating expense | 245 |
|
Other expense (income) and loss (gain), net | 1,134 |
|
Loss from discontinued operations before income taxes | (1,123 | ) |
Benefit from income taxes | — |
|
Loss from discontinued operations | $ | (1,123 | ) |
NOTE 18. SUBSEQUENT EVENTS
Sales of Common StockOn July 27, 2020, senior management personnel described in Note 15 injected approximately $0.5 million into our VIEs, thereby reducing our receivable from them to Aspire Capitalzero.
In a series of transactions between March 25, 2020 and May 12,Also on July 27, 2020, we sold 41,853,345granted to employees and directors, excluding our CEO, options to purchase approximately 5.6 million shares of our common stock to Aspire Capital understock. The option agreements governing the 2020 Aspire Purchase Agreementgrants contain a stipulation that, regardless of vesting, such options do not become exercisable until stockholders approve an increase in exchange for $30.0 million.
Our Amended and Restated Certificate of Incorporation authorizes us to issue up to 100,000,000 shares of our common stock, of which 99,408,916 shares were outstanding as of July 3, 2020. In addition, as of July 3, 2020, we had outstanding stock options allowing for the purchase of as many as approximately 10.3 million shares of common stock and we had outstanding warrants to purchase 6,641,558 shares of common stock. If all of our outstanding stock options and warrants were exercised, the total number of shares of our common stock that we would be required to issue would greatly exceed the number of our remaining authorized but unissued shares of common stock.for issuance.
As a result of such potential shortfall in the number of our authorized shares of common stock, we will have insufficient shares of common stock available to issue in connection with the exercise of our outstanding stock options and warrants or any future equity financing transaction we may seek to undertake. Accordingly, we intend to seek approval of an increase in the number of our authorized shares of common stock at our 2020 annual meeting of stockholders.
Amendment to Common Stock Purchase Agreement
On April 9,August 3, 2020, we entered into a First Amendmentthe Hughes Center Lease Settlement with the Hughes Center Landlord. Under the Hughes Center Lease Settlement, we paid $0.45 million to the Hughes Center Landlord and agreed to pay another $0.15 million in 3 equal installments on each of September 1, 2020, Aspire Purchase Agreement (the “Aspire Amendment”), which amendsOctober 1, 2020 and November 1, 2020, in full settlement of the 2020 Aspire Purchase Agreementobligations we incurred in relation to provide that (i)the office lease. If we may issue updo not make the installment payments on or before the specified dates, we will be required to pay an additional 13,220,164 shares (the
amount of approximately $0.2 million to the Hughes Center Landlord, which would increase the total aggregate settlement payments to approximately $0.8 million. The plaintiff has begun the process of discontinuing legal action against us.
“New Exchange Cap”), or 19.99% of our shares of common stock outstanding as of the date of the Aspire Amendment, pursuant to the 2020 Aspire Purchase Agreement following the effective date of the Aspire Amendment, unless stockholder approval is obtained in accordance with the rules of the Nasdaq Stock Market, (ii) if stockholder approval is not obtained, such limitation will not apply after the New Exchange Cap is reached if at all times thereafter the average purchase price paid for all shares issued under the 2020 Aspire Purchase Agreement following the effective date of the Aspire Amendment is equal to or greater than $0.3950 per share, (iii) we have the right, in our sole discretion, to present Aspire Capital with a Purchase Notice directing Aspire Capital to purchase up to 500,000 shares of our common stock per trading day, (iv) the aggregate purchase price payable by Aspire Capital on any one purchase date may not exceed $1,000,000, unless otherwise mutually agreed, (v) on any trading day on which we submit a purchase notice to Aspire Capital to purchase at least 500,000 shares of common stock, we also have the right, in our sole discretion, to present Aspire Capital with a VWAP Purchase Notice directing Aspire Capital to purchase an amount of our common stock equal to up to 30% of the aggregate shares of our common stock traded on the next trading day, (vi) the purchase price per share pursuant to such VWAP Purchase Notice will be equal to the lesser of (A) the closing sale price of our common stock on the VWAP Purchase Date, or (B) 95% of the volume-weighted average price for our common stock traded on its principal market on the VWAP Purchase Date, and (vii) Aspire Capital 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 $0.15.
Landlord Actions
On April 9, 2020, the landlord under the office lease for our former office located at 3960 Howard Hughes Parkway filed suit against us in Nevada to recover the approximately $1.1 million of rent owed plus damages resulting from the early termination of the lease. Based on calculations stipulated by the lease, we estimated the increase to rent expense and to the current portion of our operating lease liability, net of security deposit of $0.3 million, was approximately $1.5 million; this amount is subject to change based upon future events. We recorded such amount during 2019, and we report it as part of the current portion of our operating lease liability within Accrued expense and other current liabilities as of March 31, 2020.
Lender Actions and Repayment of Debt
On May 28, 2020, we repaid in full all outstanding obligations under, and terminated, the Financing Agreement. On the same date, and concurrently with repaying all outstanding obligations under the Financing Agreement, we agreed to reduce by $0.30 per share the exercise price of the CBG Financing Warrants to purchase 6,601,558 shares of our common stock.
On June 23, 2020, MGG voluntarily discontinued the legal action against us in the Supreme Court of the State of New York, County of New York.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 and six months ended March 31,June 30, 2020 in conjunction with our unaudited condensed consolidated financial statements and notes thereto set forth in Part I, Item 1 of this Quarterly Report on 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 “Special Note Regarding Forward-Looking Statements” in the section following the table of contents of this report.
OVERVIEW
We are a diversified global technology company with leading artificial intelligence (“AI”) and data-analytics solutions, as well as a portfolio of digital media properties.
Our AI Business
Through our proprietary data and AI platform, our Remark AI business (currently known in the Asia-Pacific region as KanKan, and which we report as our Technology & Data Intelligence segment) generates our data platform services revenue by delivering AI-based vision products, computing devices and software-as-a-service solutions for businesses in many industries. In addition to the other work that we have ramped up, we continue partnering with top universities on research projects targeting algorithm, artificial neural network and computing architectures which we believe keeps us among the leaders in technology development. During 2019, our research team participated in a series of computer vision competitions at the Conference on Computer Vision and Pattern Recognition and the International Conference on Computer Vision (considered the top two computer vision conferences in the world) and was ranked first or second in many of such competitions.
We continue to market Remark AI’s innovative AI-based solutions to customers in the retail, urban life cycle and workplace and food safety markets.
Retail Solutions. Utilizing a client’s existing cameras and strategic sensors placed throughout the store, Remark AI’s retail solutions swiftly analyze real-time customer shopping behavior, such as time of store entry and shelf-browsing habits, and provide managers with a customer heatmap that reflects traffic patterns. Purchase history is also analyzed, leading to relevant offers for future purchase conversions, and customers for their continued loyalty through a special VIP status that brings customized promotions and coupons along with attentive customer service. Remark AI’s retail solutions allow retailers and store managers to make better data-driven decisions regarding store layout, item placement, and pricing strategy, all while anonymizing customers’ identities to protect their privacy.
Urban Life Cycle Solutions. We offer and have installed several solutions in what we call the urban life cycle category. Our urban life cycle solutions include our AI community system which assists in building “smart” communities by enhancing community security and safety. We also have AI solutions that help to make schools “smart” by (i) providing an accurate and convenient method for student check-in and check-out, (ii) providing an autonomous method of campus monitoring that enhances students’ safety by, for example, monitoring students for elevated body temperatures that could indicate viral infections such as influenza or COVID-19, detecting trespassers, detecting dangerous behaviors or physical accidents that could result in injury, and (iii) monitoring the school kitchen for safety violations.
In traffic management, our solutions assist in monitoring traffic for various violations by automatically detecting, capturing, and obtaining evidence regarding violations such as speeding, running red lights, driving against the flow of traffic and even using counterfeit registration plates. Additionally, our solutions provide constant road-condition monitoring, providing control centers with real-time information on traffic conditions such as areas of congestion or other traffic anomalies.
Workplace and Food Safety Solutions. The monitoring and detection capabilities of our solutions ensure that workers are practicing established food safety protocols, wearing the proper personal protective equipment, and complying with local health
| | | | | | | | |
| 22 | Financial Statement Index |
codes. From commercial kitchens to factories to construction work zones, our safety-compliance algorithms manage regulatory functions, review hygienic and equipment status while checking and alerting management regarding violations.
Our Bio-Safety Business
The first half of 2020 was one of renewed focus for us as we repurposed and improved our existing urban life cycle solution that we were selling to make schools in China “smart” schools to build a new product line of high-quality, highly-effective thermal imaging solutions that leverage our innovative software. We currently focus our efforts predominantly in the U.S. market.
Remark AI Thermal Kits. We sell our Remark AI Thermal Kits to customers needing the ability to scan crowds and areas of high foot traffic for indications that certain persons with elevated temperatures may require secondary screening. Though the kits are semi-customizable, they generally consist primarily of a thermal imaging camera, a calibrating device, a computer to monitor the video feed, supporting equipment and our AI software. Once set up and calibrated, the kits scan a large number of people each minute, providing both thermally enhanced and standard video feeds that allow our customers to evaluate high volumes of people at large gatherings.
Remark AI Thermal Pads. Our Remark AI rPad thermal imaging devices, usually mounted on a wall or a single-post stand, are designed for customers needing the ability to scan individuals on a one-by-one basis in situations where rapid, high-volume scanning is not necessary, such as at a customer’s office entrances where employees can be scanned as they enter for indications of an elevated temperature that may require secondary screening. In addition to thermal scanning, we can customize our AI software embedded in the rPad to perform additional safety and security functions including identifying persons for authorized entry.
We have also developed the Remark AI Thermal Helmet which can, for example, be worn by security personnel at large gatherings allowing for a mobile thermal scanning ability.
Other Businesses
In addition to our AI and data analytics solutions, weWe also maintain a digital media portfolio which, in addition to operating businesses, includes an approximately five percent4.5% ownership in the issued stock of Sharecare, Inc., an established health and wellness platform with more than 100 million users, which has now raised in excess of $425 million of total capital. We continue to evaluate opportunities to monetize and maximize the value of this asset for our shareholders. In addition to Data Platform Services revenue from our Remark AI business, activities such as online merchandise sales generated from Bikini.com, our e-commerce website selling swimwear and accessories in the latest styles, also contributed to our consolidated revenue in the current-year and prior-year periods, while advertising also contributed to revenue in prior-year periods.
Overall Business Outlook
Our innovative AI and data analytics solutions continue to gain worldwide awareness and recognition through media exposure, comparative testing, product demonstrations and word of mouth resulting from positive responses and increased acceptance. 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 other countries where we see a tremendous number of requests for AI products and solutions in the workplace and public safety markets, especially in response to the COVID-19 pandemic. However, the COVID-19 pandemic may also continue to 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. Quickly deploying our software solutions in the market segments we have identified, in which we may face a number of large, well-known competitors, is also difficult.
| | | | | | | | |
| 23 | Financial Statement Index |
Business Developments During 2020
TheAfter spending most of the first quarter of 2020 was one of renewed focus for us as we repurposed and improved our existing urban life cycle solution that we were selling to make schools in China “smart” schools to build a new product line of high-quality, highly-effective thermal imaging solutions that leverage our innovative software to provide customers with the ability to scan crowds and areas of high foot traffic for indications that certain persons may require secondary screening. We spent most of the quarter on product development and relationship building, with nowe were able to launch our bio-safety business in the second quarter of 2020 and begin recognizing revenue recognized from sales of the new products. Our expectation is that the U.S. will be the primary market for this new product line, though we will continue to work to develop other markets as well.
Though Chinese New Year celebrations, working capital constraints and the U.S.-China trade war had some adverse impact, our business has also been significantly impacted by the COVID-19 pandemic, which has resulted in national and local governmental authorities across the world implementing numerous preventative measures in an effort to control the spread of the virus, including travel restrictions, shelter-in-place orders, school closings, closure of non-essential businesses and other quarantine measures. The pandemic and the related preventative measures have limited our operational capabilities by preventing our employees from working for long periods of time and causing many of our customers to delay implementation of contracts we already signed with them, all of which has adversely impacted our business and results of operations. Our business and financial results may be materially and adversely impacted by the COVID-19 pandemic for the duration of 2020 or longer, and we are unable to predict the duration or degree of such impact with any certainty.
The following table presents our revenue categories as a percentage of total consolidated revenue during the threesix months ended March 31,June 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| | | | | | | |
AI-based products and services | 89 | % | | 86 | % | | 87 | % | | 71 | % |
Advertising and other | 11 | % | | 14 | % | | 13 | % | | 29 | % |
|
| | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
AI-based products and services | 75 | % | | 35 | % |
Advertising and other | 25 | % | | 65 | % |
Matters Affecting Comparability of Results
During the second quarter of 2019, we disposed of the subsidiaries comprising our former Travel and Entertainment segment and we have reported such former segment as a discontinued operation in the three months ended March 31, 2019 in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. Unless otherwise noted therein, the Results of Operations section below only discusses our continuing operations.
CRITICAL ACCOUNTING POLICIES
During the three and six months ended March 31,June 30, 2020, we made no material changes to our critical accounting policies as we disclosed them in Part II, Item 7 of our 2019 Form 10-K.
RESULTS OF OPERATIONS
The following discussion summarizes our operating results for the three and six months ended March 31,June 30, 2020 compared to the three and six months ended March 31,June 30, 2019.
| | | | | | | | |
| 24 | Financial Statement Index |
Reportable Segment Results
Technology & Data Intelligence
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Three Months Ended June 30, | | | | Change | | |
| 2020 | | 2019 | | Dollars | | Percentage |
Revenue | $ | 987 | | | $ | 2,465 | | | $ | (1,478) | | | (60) | % |
| | | | | | | |
Cost of revenue | 540 | | | 1,311 | | | (771) | | | (59) | % |
Sales and marketing | 124 | | | 119 | | | 5 | | | 4 | % |
Technology and development | 1,420 | | | 776 | | | 644 | | | 83 | % |
General and administrative | 253 | | | 402 | | | (149) | | | (37) | % |
Depreciation and amortization | 34 | | | 135 | | | (101) | | | (75) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(dollars in thousands) | Six Months Ended June 30, | | | | Change | | |
| 2020 | | 2019 | | Dollars | | Percentage |
Revenue | $ | 1,311 | | | $ | 2,890 | | | $ | (1,579) | | | (55) | % |
| | | | | | | |
Cost of revenue | 555 | | | 2,604 | | | (2,049) | | | (79) | % |
Sales and marketing | 219 | | | 445 | | | (226) | | | (51) | % |
Technology and development | 1,999 | | | 2,002 | | | (3) | | | — | % |
General and administrative | 529 | | | 854 | | | (325) | | | (38) | % |
Depreciation and amortization | 87 | | | 305 | | | (218) | | | (71) | % |
| | | | | | | |
Other operating expense | — | | | 6 | | | (6) | | | (100) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | |
(dollars in thousands) | Three Months Ended March 31, | | Change |
| 2020 | | 2019 | | Dollars | | Percentage |
Revenue | $ | 324 |
| | $ | 425 |
| | $ | (101 | ) | | (24 | )% |
| | | | | | | |
Cost of revenue | 15 |
| | 1,293 |
| | (1,278 | ) | | (99 | )% |
Sales and marketing | 95 |
| | 326 |
| | (231 | ) | | (71 | )% |
Technology and development | 579 |
| | 1,226 |
| | (647 | ) | | (53 | )% |
General and administrative | 276 |
| | 452 |
| | (176 | ) | | (39 | )% |
Depreciation and amortization | 53 |
| | 170 |
| | (117 | ) | | (69 | )% |
Other operating expense | — |
| | 6 |
| | (6 | ) | | (100 | )% |
Revenue and Cost of Revenue. During the three and six months ended March 31,June 30, 2020, we did not complete as many projects as in the comparable period, as the combined effects of the COVID-19 pandemic, the ongoing U.S.-China trade war and working capital constraints and Chinese New Year celebrations conspiredin the first quarter of 2020 continued to weighhave an impact on our business. The comparable periodperiods of the prior year included several project completions, includingwith one in the first quarter of 2019 that was a larger project for which we recognized approximately $0.9 million in cost of revenue despite not being able to recognize the associated revenue due to uncertainty of collection of contract amounts due us.
Sales and marketing. OurDuring the six months ended June 30, 2020, our sales and marketing expense decreased almost entirely as a result of a reduction in headcount that resulted in decreased payroll-related expense as well as stock-basedshare-based compensation expense.
Technology and development. Our technology and development expense also decreased primarily as a result of headcount reduction.increased during three months ended June 30, 2020 due entirely to the increase in our stock price during the quarter, which led to an increase in share-based compensation expense on our liability-classified awards.
General and administrative. As part of our continued effort to reduce costs, we moved to a new office space in Chengdu, China under a lease that resulted in approximately $0.1$0.2 million less rent expense during the threesix months ended March 31,June 30, 2020. Another $0.1 million decrease resulted from less use of professional services.
Depreciation and Amortization. The decrease in this category resulted from normal depreciation and amortization and from certain assets that fully depreciated in the comparable period of the prior year.
Consolidated Results
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Three Months Ended June 30, | | | | Change | | |
| 2020 | | 2019 | | Dollars | | Percentage |
Revenue | $ | 2,299 | | | $ | 2,865 | | | $ | (566) | | | (20) | % |
| | | | | | | |
Cost of revenue | 1,210 | | | 1,541 | | | (331) | | | (21) | % |
Sales and marketing | 486 | | | 687 | | | (201) | | | (29) | % |
Technology and development | 1,477 | | | 854 | | | 623 | | | 73 | % |
General and administrative | 1,898 | | | 2,454 | | | (556) | | | (23) | % |
Depreciation and amortization | 66 | | | 260 | | | (194) | | | (75) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Interest expense | (775) | | | (553) | | | (222) | | | 40 | % |
Other income | 57 | | | 92 | | | (35) | | | (38) | % |
| | | | | | | |
Change in FV of warrant liability | (6,260) | | | 2,078 | | | (8,338) | | | (401) | % |
Other gain (loss) | — | | | 27 | | | (27) | | | (100) | % |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | |
(dollars in thousands) | Three Months Ended March 31, | | Change |
| 2020 | | 2019 | | Dollars | | Percentage |
Revenue | $ | 431 |
| | $ | 1,209 |
| | $ | (778 | ) | | (64 | )% |
| | | | | | | |
Cost of revenue | 21 |
| | 1,593 |
| | (1,572 | ) | | (99 | )% |
Sales and marketing | 416 |
| | 859 |
| | (443 | ) | | (52 | )% |
Technology and development | 648 |
| | 1,304 |
| | (656 | ) | | (50 | )% |
General and administrative | 2,740 |
| | 2,977 |
| | (237 | ) | | (8 | )% |
Depreciation and amortization | 90 |
| | 325 |
| | (235 | ) | | (72 | )% |
Other operating expense | — |
| | 6 |
| | (6 | ) | | (100 | )% |
| | | | | | | |
Interest expense | (461 | ) | | (387 | ) | | (74 | ) | | 19 | % |
Other income | — |
| | (45 | ) | | 45 |
| | (100 | )% |
Gain on lease termination | 1,538 |
| | — |
| | 1,538 |
| |
|
Change in FV of warrant liability | 57 |
| | (1,416 | ) | | 1,473 |
| | (104 | )% |
Other gain (loss) | (73 | ) | | (26 | ) | | (47 | ) | | 181 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Six Months Ended June 30, | | | | Change | | |
| 2020 | | 2019 | | Dollars | | Percentage |
Revenue | $ | 2,730 | | | $ | 4,074 | | | $ | (1,344) | | | (33) | % |
| | | | | | | |
Cost of revenue | 1,231 | | | 3,134 | | | (1,903) | | | (61) | % |
Sales and marketing | 902 | | | 1,546 | | | (644) | | | (42) | % |
Technology and development | 2,125 | | | 2,158 | | | (33) | | | (2) | % |
General and administrative | 4,638 | | | 5,431 | | | (793) | | | (15) | % |
Depreciation and amortization | 156 | | | 585 | | | (429) | | | (73) | % |
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Other operating expense | — | | | 6 | | | (6) | | | (100) | % |
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Interest expense | (1,236) | | | (940) | | | (296) | | | 31 | % |
Other income | 57 | | | 47 | | | 10 | | | 21 | % |
Gain on lease termination | 1,538 | | | — | | | 1,538 | | | |
Change in FV of warrant liability | (6,203) | | | 662 | | | (6,865) | | | (1,037) | % |
Other gain (loss) | (73) | | | 1 | | | (74) | | | (7,400) | % |
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In addition to the results of operations of our reportable segment that we described above, the following items impacted our consolidated results of operations:
Revenue and Cost of Revenue. During the three months ended March 31,June 30, 2020, revenue from our Remark Entertainmentnew bio-safety business decreased $0.5increased $1.1 million due to contracts that ended in the prior year thatas we did not renew,launched our thermal imaging product line, while e-commerce revenue decreased about $0.2$0.1 million due to the combined effects of our decision to sell portions of our inventory at lower costs as well as reduced orders as the COVID-19 pandemic set in and changed consumer behavior.
During the six months ended June 30, 2020, the $1.1 million increase in revenue from our bio-safety business was partially offset as revenue from our Remark Entertainment business decreased $0.5 million due to contracts that ended in the prior year that we did not renew, while e-commerce revenue decreased about $0.3 million due to the combined effects of our decision to sell portions of our inventory at lower costs as well as reduced orders as the COVID-19 pandemic set in and changed consumer behavior.
Because we had recognized a full reserve against our inventory in the prior year, e-commerce cost of revenue decreased during the three and six months ended March 31,June 30, 2020.
Sales and marketing. The decrease in sales and marketing expense for the threesix months ended March 31,June 30, 2020 primarily resulted from a decrease in headcount.
General and administrative. The decreasePayroll and related costs and share-based compensation collectively decreased in general and administrative expense incurred by our non-reportable-segment businesses induring the first quarter ofthree and six months ended June 30, 2020 resulted because the comparable period of the prior year containedby $0.2 million and $0.4 million, respectively, as a result of legal and accounting costs relateda decrease in headcount. Rent also decreased during the three months ended June 30, 2020 due to the pending sale ofa less-costly lease on our Vegas.com business.office space in Las Vegas.
Interest expense. Our prepayment of a large portion of our debt when we completed the sale of Vegas.com resulted in the decrease in interest expense for the three and six months ended March 31,June 30, 2020.
Gain on lease termination. We recognized a gain when we terminated the lease for our former office space during the threesix months ended March 31,June 30, 2020, while the comparable period of the prior year reflected no comparable activity.
Change in fair value of warrant liability. The fair value of our warrant liability maintains a direct relationship with the price of our common stock, such that the decreaseincreases in our common stock price between March 31, 2020 and June 30, 2020 and between December 31, 2019 and March 31,June 30, 2020 resulted in a corresponding decreaseincreases in the fair value of our warrant liability. The decreasedecreases in our common stock price waswere much smallerlarger in scale than the increaseincreases in our common stock price between March 31, 2019 and June 30, 2019 and between December 31, 2018 and March 31, 2019 and, asJune 30, 2019. As a result, we recognized only a small gainlarge losses in the current periodcurrent-year periods compared to the large losssmall to moderate gains we recognized during the same periodperiods of 2019.
LIQUIDITY AND CAPITAL RESOURCES
Overview
During the threesix months ended March 31,June 30, 2020, and in each fiscal year since our inception, we have incurred net losses which have resulted in an accumulated deficit of $349.3$359.1 million as of March 31,June 30, 2020. Additionally, our operations have historically used more cash than they have provided. Net cash used in continuing operating activities was $2.8$9.2 million during the threesix months ended March 31,June 30, 2020. As of March 31,June 30, 2020, our cash and cash equivalents balance was $1.6$10.2 million, and we had a negative working capital balance of $28.8$4.8 million.
As of March 31, 2020, weWe were a party to the Financing Agreement with the Lenders pursuant to which the Lenders extended credit to the Borrowersus consisting of a term loan in the aggregate principal amount of $11.9 million of principal and accrued interest outstanding as of March 31, 2020 (the “Loan”). Additionally, as of March 31, 2020, the Loan bore interest at three-month LIBOR (with a floor of 2%) plus 11% per annum, payable monthly, and had a maturity date of$35.5 million.
On May 15,
2020. The material terms2019, we completed the sale of all of the
Financing Agreement,issued and outstanding membership interests of Vegas.com and used the
amendments thereto, and related documents effective ascash proceeds of
March 31, 2020 are described in Note 12 in the Notes$30.0 million to Unaudited Condensed Consolidated Financial Statements.
The Financing Agreement contained certain affirmative and negative covenants. As of March 31, 2020, we were not in compliance with certain of such covenantspay amounts due under the Financing Agreement, including a covenant requiring us to obtain and pay for a tail directors’ and officers’ liability insurance policy (the “Tail Policy”) by June 4, 2019 in connection with the VDC Transaction, and a covenant requiring us to make the final Earnout Payment by June 14, 2019. Additionally, although we have actively taken steps to monetize our ownership interest in Sharecare, we did not comply with certain procedural requirements set forth in the Financing Agreement with respect to such sale process. Our non-compliance with such covenants constituted events of default under the Financing Agreement. In addition, in June 2019, the Lenders paid the $1.1which approximately $10.0 million of premium under the Tail Policy on our behalf and such amount was addedremained outstanding after giving effect to the amountapplication of principal due under the Financing Agreement.such cash proceeds.
On March 16, 2020, we received a notice of acceleration from MGG, in which MGG declared that the entire unpaid principal of and any accrued and unpaid interest on the Loan, and all fees and other amounts payable under the Financing Agreement, was immediately due and payable and demanded that all such amounts be paid immediately to MGG.
On May 28, 2020, we repaid in full all outstanding obligations under, and terminated, the Financing Agreement in an amount equal to approximately $12.7 million.
On April 12, 2017, we issued a short-term note payable in the principal amount of $3.0 million to a private lender in exchange for cash in the same amount. The agreement, which does not have a stated interest rate, required us to repay the note plus a fee of $115 thousand on the maturity date of June 30, 2017. The note is accruing interest at $500 per day on the unpaid principal until we repay the note in full. As of March 31,June 30, 2020, we owed $3.3$2.4 million in principal and accrued interest on such note.
Pursuant to the terms of the purchase agreement we entered into in connection with our acquisition of Vegas.com in 2015, we were obligated to make an Earnout Payment of $1.0 million based upon the performance of Vegas.com in the year ended December 31, 2018, but we have not yet made such payment.
On March 3, 2020, we entered into the 2020 Aspire Purchase Agreement, later amended on April 9, 2020, with Aspire Capital under which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Aspire Capital to purchase up to an aggregate ofpurchased $30.0 million of shares of our common stock over the 30-month term of the 2020 Aspire Purchase Agreement.stock. The 2020 Aspire Purchase Agreement terminated and replaced the 2019 Aspire Purchase Agreement, which terminated under the terms of the 2020 Aspire Purchase Agreement. We issued 2,374,545 shares of our common stock to Aspire Capital upon commencement of the 2020 Aspire Purchase Agreement. Purchases under the 2020 Aspire Purchase Agreement, which is described in more detail in Note 14 in the Notes to Unaudited Condensed Consolidated Financial Statements, are made at prices calculated in accordance with the terms of the 2020 Aspire Purchase Agreement at the time of our submission to Aspire Capital of a purchase notice specifying such number of shares to be purchased, subject to maximum dollar and share amounts for sales on any one date unless the parties mutually agree otherwise.
Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities, in conjunction with the ongoing events of default under the Financing Agreement, 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 in our Technology and Data Intelligence segment, 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 and potential sales of investment assets or operating businesses.
Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (in particular, in response to the COVID-19 pandemic), 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, cash equivalents and cash resources, and based on the probable success of one or more of the following plans:
•develop and grow new product line(s)
•monetize existing assets
•obtain additional capital through equity issuances, including but not limited to equity issuances to Aspire Capital under its existing purchase commitment (which equity issuances may significantly dilute existing stockholders).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 July 6,August 14, 2021.
Cash Flows - Continuing Operating Activities
During the threesix months ended March 31,June 30, 2020, we used $3.2$1.8 million lessmore cash in continuing operating activities than we did during the same period of the prior year. The decreaseincrease in cash used in continuing operating activities resulted fromis a reduction in our business operations asresult of the COVID-19 pandemic took hold, and was also attributabletiming of payments related to elements of working capital restraints.capital.
Cash Flows - Continuing Investing Activities
We did not engageengaged in de minimis investing activities during the threesix months ended March 31,June 30, 2020, and the change in investing activities from the comparable period of the prior year was not material.
Cash Flows - Financing Activities
During the threesix months ended March 31,June 30, 2020, we received $4.6$32.0 million from sales of shares of our common stock reflecting more activity under our agreements with Aspire Capital, whereas the same period of 2019 included stock sale proceeds of only $2.5$7.5 million. We also received debt proceeds of $0.4 million and repaid $13.3 million of debt, while the same period of the prior year included debt repayment of $25.5 million plus loan fee and debt issuance cost payments of $2.3 million.
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.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicableapplicable.
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ITEM 4. | CONTROLS AND PROCEDURES |
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 Technology and Data Intelligence segment, (iii) an aggregation of deficiencies in our monitoring and activity-level controls related to processes in our Technology and Data Intelligence segment 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 2019 Form 10-K, our disclosure controls and procedures were not effective at a reasonable assurance level as of March 31,June 30, 2020.
Changes in Internal Control over Financial Reporting
In our 2019 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, we are implementing procedural changes that we believe will remediate the material weaknesses, but not all such changes are complete and those changes that have been implemented have not operated for a sufficient time to be evaluated for their effectiveness; therefore, there was no change in our internal control over financial reporting during such period 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
CBG Litigation
On February 21, 2018, we initiated a legal proceeding (the “CBG Litigation”) against CBG, Adam Roseman, and CBG’s Joint Official Liquidators (the “JOLs”) arising from the CBG Acquisition. The CBG Litigation was filed in the United States District Court for the District of Nevada and is captioned as Remark Holdings, Inc., et al. v. China Branding Group, Limited (In
Official Liquidation), et al., Case No. 2:18-cv-00322. In the CBG Litigation, we sought a declaration from the court that we are entitled to rescission of the purchase agreement relating to the CBG Acquisition and all transactions related to the CBG Acquisition, a declaration that such purchase agreement and the transactions consummated pursuant thereto be rescinded and void ab initio, a declaration that we are not required to deliver the remaining CBG Acquisition Warrants allowing for the purchase of 5,710,000 shares of common stock at a per-share exercise price of $10.00, an order directing release to us of any consideration held in escrow in connection with the CBG Acquisition, and disgorgement of all consideration paid by us in connection with the CBG Acquisition. We alleged that the defendants fraudulently mispresented and concealed material information regarding the companies we acquired in the CBG Acquisition.
We entered into a settlement agreement with Mr. Roseman to settle all claims against him, and we dismissed those claims on May 13, 2019. We entered into a Stipulation for Settlement dated January 15, 2019 with CBG and the JOLs, which sets forth the binding terms of their settlement agreement (the “Stipulation for Settlement”). Pursuant to the Stipulation for Settlement, we will issue fully-transferable warrants on a non-diluted basis allowing for the purchase of 5,710,000 shares of our common stock at a per-share exercise price of $6.00, which warrants are exercisable for a period of 5 years from the date of the Stipulation for Settlement, and which we have the right to cause the warrant holders to exercise if the closing price of our common stock is $8.00 or greater on any 5 non-consecutive days in any consecutive 30-day trading window. The parties to the Stipulation for Settlement also agreed to negotiate anti-dilution provisions for the warrants. In exchange for the foregoing consideration, the parties to the Stipulation for Settlement agreed to release their claims against each other and enter into a written definitive settlement agreement. After entering into the Stipulation for Settlement, the JOLs demanded the warrants also include an exchange right. We rejected this request and filed a motion to enforce the Stipulation for Settlement on March 12, 2019. The Nevada court issued a report and recommendation on August 2, 2019, which was affirmed on September 24, 2019, requiring the JOLs to submit the written definitive settlement agreement (without an exchange right) to the Grand Court of the Cayman Islands overseeing CBG’s liquidation for approval. An application for sanction to enter the settlement agreement was filed with the Grand Court on December 3, 2019. One month later, on or about January 2, 2020, the Grand Court approved the application, authorizing CBG and the JOLs to enter into the settlement. Counsel for the parties are currently finalizing the settlement agreement.
Greenspun Litigation
On May 21, 2019, James B. Gibson, in his capacity as the designated representative of the Amy Greenspun Arenson 2010 Legacy Trust, James Adam Greenspun 2010 Legacy Trust, Moira Greenspun Tarmy 2010 Legacy Trust, Jeffrey Aaron Fine 2010 Legacy Trust, Alyson Fine Marmur 2010 Legacy Trust, Jonathan M. Fine 2010 Legacy Trust, Kathryn A. Fine 2010 Legacy Trust, DRG Holdings, LP, DRG Legacy Limited Partnership, LLP and GC Investments, LLC, filed a Complaint against us in the District Court for Clark County, Nevada alleging that we breached the purchase agreement we entered into in
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| 30 | Financial Statement Index |
connection with our acquisition of Vegas.com from the plaintiffs in 2015 by failing to make the final earnout payment under such purchase agreement. On July 12, 2019, the Nevada court entered a judgment against us in the total amount of $1,050,000. We are currently in the process of negotiating a settlement with the plaintiffs to resolve this matter.
MGG Litigation
On March 16, 2020, MGG filed a Summons with Notice against us in the Supreme Court of the State of New York, County of New York, alleging a claim for breach of contract under the Financing Agreement. On June 23, 2020, MGG voluntarily discontinued the legal action against us.
Landlord Litigation
On April 9, 2020, our former landlord, BRE/HC Las Vegas Property Holdings, L.L.C.,the Hughes Center Landlord filed a Complaint against us in the District Court for Clark County, Nevada alleging that we breached the office lease we entered into with the plaintiff for our former office located at 3960 Howard Hughes Parkway in Las Vegas, Nevada by failing to pay rent and other required charges under such lease. The plaintiff is seeking monetary damages in the amount of past due rent and other charges, plus attorneys’ fees and costs and interest and certain declaratory relief. We are currentlyOn August 3, 2020, we executed a settlement agreement with the plaintiff under which we paid $0.45 million and agreed to pay another $0.15 million in three equal installments, to plaintiff in full settlement of the obligations we incurred in relation to the office lease. If we do not make the installment payments on or before the specified dates, we will be required to pay an additional amount of approximately $0.2 million to the Hughes Center Landlord, which would increase the total aggregate settlement payments to approximately $0.8 million. The plaintiff has begun the process of negotiating a settlement with the plaintiff to resolve this matter.discontinuing legal action against us.
The continuing impacts of COVID-19 are highly unpredictable and could be significant, and may have an adverse effect on our business and financial results.
The global outbreak of COVID-19 has impacted our business and could continue to have a significant impact on our business for the duration of 2020 or longer. The impact of the COVID-19 on our business and future financial results could include, but may not be limited to:
•lack of revenue growth or decreases in revenue due to a lack of, or at least a decline in, customer demand and (or) deterioration in the credit quality of our customers;
•a significant increase in our need for external financing to maintain operations as a result of decreased revenue;
•significant decline in the debt and equity markets, thus impacting our ability to conduct financings on terms acceptable to us; and
•the rapid and broad-based shift to a remote working environment creates inherent productivity, connectivity, and oversight challenges. Preventative measures implemented by governmental authorities, such as travel restrictions, shelter-in-place orders and business closures, could significantly impact the ability of our employees and vendors to work productively. Governmental restrictions have been globally inconsistent and it is not clear when a return to worksite locations or travel will be permitted or what restrictions will be in place in those environments. In addition, the changed environment under which we are operating could have an impact on our internal controls over financial reporting as well as our ability to meet a number of our compliance requirements in a timely or quality manner.
The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration and severity of the outbreak, the length of the travel restrictions and business closures imposed 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 situation is changing rapidly, and additional impacts may arise that we are not aware of currently.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicableapplicable.
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ITEM 3. | ITEM 3. DEFAULTS UPON SENIOR SECURITIES |
As of March 31, 2020, we were not in compliance with a covenant requiring us to obtain and pay for the Tail Policy by June 4, 2019, and a covenant requiring us to make the final Earnout Payment by June 14, 2019. Additionally, although we have actively taken steps to monetize our ownership interest in Sharecare, we did not comply with certain procedural requirements stipulated by the Sharecare Covenant. These and other matters described herein constitute events of default under the Financing Agreement for which we have not received a waiver as of the date of this report. On May 28, 2020, we repaid in full all outstanding obligations under, and terminated, the Financing Agreement.
Not applicable.
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ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicableapplicable.
ITEM 5. OTHER INFORMATION
None
None
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| | | | Incorporated Herein By Reference To |
Exhibit Number | | Description | | Document | | Filed On | | Exhibit Number |
| | | | 8-K | | 03/04/2020 | | 4.1 |
| | | | 8-K | | 03/04/2020 | | 10.1 |
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101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | |
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| | | | Incorporated Herein By Reference To | | | | |
Exhibit Number | | Description | | Document | | Filed On | | Exhibit Number |
| | | | 8-K | | 7/20/20 | | 3.1 |
| | | | 8-K | | 7/24/20 | | 3.1 |
| | | | 8-K | | 7/31/20 | | 3.1 |
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101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | |
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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.
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| | | | REMARK HOLDINGS, INC. |
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Date: | August 14, 2020 | By: | | REMARK HOLDINGS, INC. |
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Date: | July 6, 2020 | By: | | /s/ Kai-Shing Tao |
| | | | Kai-Shing Tao |
| | | | Chairman and Chief Executive Officer |
| | | | (principal executive, financial and accounting officer) |