UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~March 31,~~September 30, 2022

Commission File Number 001-33720

Remark Holdings, Inc.

Delaware

33-1135689

State of Incorporation

IRS Employer Identification Number

800 S. Commerce St.

Las Vegas, NV 89106

Address, including zip code, of principal executive offices

702-701-9514

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.001 par value per share

MARK

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☑

Smaller reporting company

☑

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of ~~May 12,~~November 11, 2022, a total of ~~105,157,769~~106,407,769 shares of our common stock were outstanding.

TABLE OF CONTENTS


Table of Contents			i

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The matters discussed in this Quarterly Report on Form 10-Q (this “Form 10-Q”) include “forward-looking statements” about the plans, strategies, objectives, goals or expectations of Remark Holdings, Inc. and subsidiaries (“Remark”, “we”, “us”, “our”). You will find forward-looking statements principally in the sections entitled Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations. Such forward-looking statements are identifiable by words or phrases indicating that Remark or management “expects,” “anticipates,” “plans,” “believes,” or “estimates,” or that a particular occurrence or event “will,” “may,” “could,” “should,” or “will likely” result, occur or be pursued or “continue” in the future, that the “outlook” or “trend” is toward a particular result or occurrence, that a development is an “opportunity,” “priority,” “strategy,” “focus,” that we are “positioned” for a particular result, or similarly-stated expectations. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report or such other report, release, presentation, or statement.

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.


Table of Contents			ii

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

REMARK HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(dollars in thousands, except share and per share amounts)

March 31, 2022 December 31, 2021
(Unaudited)
Assets
Cash $ 2,691 $ 14,187
Trade accounts receivable, net 11,293 10,267
Inventory, net 1,492 1,346
Investment in marketable securities 21,444 42,349
Prepaid expense and other current assets 8,273 6,363
Total current assets 45,193 74,512
Property and equipment, net 1,274 357
Operating lease assets 246 194
Other long-term assets 403 440
Total assets $ 47,116 $ 75,503
Liabilities
Accounts payable $ 10,099 $ 10,094
Accrued expense and other current liabilities 5,201 5,963
Contract liability 432 576
Notes payable, net of unamortized discount and debt issuance cost of $1,095 and $2,189 at March 31, 2022 and December 31, 2021, respectively 25,208 27,811
Total current liabilities 40,940 44,444
Operating lease liabilities, long-term 55 25
Total liabilities 40,995 44,469
Commitments and contingencies 0 0
Stockholders’ Equity
Preferred stock, $0.001 par value; 1,000,000 shares authorized; zero issued — —
Common stock, $0.001 par value; 175,000,000 shares authorized; 105,157,769 shares issued and outstanding at each of March 31, 2022 and December 31, 2021 105 105
Additional paid-in-capital 364,753 364,239
Accumulated other comprehensive income (268) (270)
Accumulated deficit (358,469) (333,040)
Total stockholders’ equity 6,121 31,034
Total liabilities and stockholders’ equity $ 47,116 $ 75,503




	September 30, 2022		December 31, 2021
	(Unaudited)
Assets
Cash	$	376	$	14,187
Trade accounts receivable, net	5,753		10,267
Inventory, net	1,545		1,346
Investment in marketable securities	—		42,349
Deferred cost of revenue	5,630		589
Prepaid expense and other current assets	1,550		5,774
Total current assets	14,854		74,512
Property and equipment, net	1,404		357
Operating lease assets	118		194
Other long-term assets	312		440
Total assets	$	16,688	$	75,503
Liabilities
Accounts payable	$	9,202	$	10,094
Advances from related parties	870		—
Accrued expense and other current liabilities	6,570		5,963
Contract liability	293		576
Notes payable, net of unamortized discount and debt issuance cost of $2,189 at December 31, 2021	14,418		27,811
Total current liabilities	31,353		44,444

Operating lease liabilities, long-term	25		25


Total liabilities	31,378		44,469

Commitments and contingencies

Stockholders’ Equity (Deficit)
Preferred stock, $0.001 par value; 1,000,000 shares authorized; zero issued	—		—
Common stock, $0.001 par value; 175,000,000 shares authorized; 106,407,769 and 105,157,769 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively	106		105
Additional paid-in-capital	366,263		364,239
Accumulated other comprehensive loss	(1,137)		(270)
Accumulated deficit	(379,922)		(333,040)
Total stockholders’ equity (deficit)	(14,690)		31,034
Total liabilities and stockholders’ equity (deficit)	$	16,688	$	75,503

See Notes to Unaudited Condensed Consolidated Financial Statements


Table of Contents			1

REMARK HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations and Comprehensive ~~Loss~~Income (Loss)

(dollars in thousands, except per share amounts)


		Three Months Ended March 31,			Three Months Ended September 30,						Nine Months Ended September 30,
			2022			2021			2022		2021		2022		2021
Revenue, including $2.2 million from China Business Partner (See Note 13)			$	4,667		$	4,406
Revenue, including amounts from China Business Partner (See Note 15)								Revenue, including amounts from China Business Partner (See Note 15)	$	2,812	$	1,234	$	10,037	$	9,656
Cost and expense	Cost and expense							Cost and expense
Cost of revenue (excluding depreciation and amortization)	Cost of revenue (excluding depreciation and amortization)		4,270			2,752		Cost of revenue (excluding depreciation and amortization)	2,459		854		8,576		5,858
Sales and marketing	Sales and marketing		148			1,001		Sales and marketing	270		882		606		2,281

Technology and development	Technology and development		455			1,550		Technology and development	41		635		1,004		3,490
General and administrative	General and administrative		3,939			2,697		General and administrative	6,726		5,493		14,598		10,672
Depreciation and amortization	Depreciation and amortization		41			66		Depreciation and amortization	43		35		121		150

Total cost and expense	Total cost and expense		8,853			8,066		Total cost and expense	9,539		7,899		24,905		22,451
Operating loss	Operating loss		(4,186)			(3,660)		Operating loss	(6,727)		(6,665)		(14,868)		(12,795)
Other income (expense)	Other income (expense)							Other income (expense)
Interest expense	Interest expense		(2,186)			(235)		Interest expense	(1,365)		(438)		(5,325)		(1,053)

Change in fair value of warrant liability	Change in fair value of warrant liability		—			(1,610)		Change in fair value of warrant liability	—		411		—		123
Loss on investment			(19,056)			—
Gain (loss) on investment								Gain (loss) on investment	(348)		78,917		(26,356)		78,917

Gain on debt extinguishment								Gain on debt extinguishment	—		425		—		425

Other gain (loss), net	Other gain (loss), net		(1)			44		Other gain (loss), net	(493)		96		(342)		116
Total other expense, net			(21,243)			(1,801)

Net loss			$	(25,429)		$	(5,461)
Total other income (expense), net								Total other income (expense), net	(2,206)		79,411		(32,023)		78,528
Loss before income taxes								Loss before income taxes	(8,933)		72,746		(46,891)		65,733
Provision for income taxes								Provision for income taxes	9		—		9		(9)
Net income (loss)								Net income (loss)	$	(8,924)	$	72,746	$	(46,882)	$	65,724
Other comprehensive income	Other comprehensive income							Other comprehensive income
Foreign currency translation adjustments	Foreign currency translation adjustments		2			42		Foreign currency translation adjustments	(445)		(9)		(867)		46
Comprehensive loss			$	(25,427)		$	(5,419)
Comprehensive income (loss)								Comprehensive income (loss)	$	(9,369)	$	72,737	$	(47,749)	$	65,770

Weighted-average shares outstanding, basic and diluted			105,157,769			99,758,589
Weighted-average shares outstanding, basic								Weighted-average shares outstanding, basic	105,290,553		100,140,650		105,290,553		100,087,288
Weighted-average shares outstanding, diluted								Weighted-average shares outstanding, diluted	105,290,553		100,379,533		105,290,553		100,409,650

Net loss per share, basic and diluted			$	(0.24)		$	(0.05)
Net income (loss) per share, basic								Net income (loss) per share, basic	$	(0.08)	$	0.73	$	(0.45)	$	0.66
Net income (loss) per share, diluted								Net income (loss) per share, diluted	$	(0.08)	$	0.72	$	(0.45)	$	0.65

See Notes to Unaudited Condensed Consolidated Financial Statements


Table of Contents			2			Financial Statement Index

REMARK HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(in thousands, except number of shares)


			Three Months Ended September 30, 2022
															Common Stock Shares	Common Stock Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
Balance at June 30, 2022														Balance at June 30, 2022	105,157,769	$	105	$	365,263	$	(692)	$	(370,998)	(6,322)
Net loss														Net loss	—	—		—		—		(8,924)		(8,924)
Share-based compensation														Share-based compensation	—	—		501		—		—		501

Common stock issued for services														Common stock issued for services	1,250,000	1		499		—		—		500

Foreign currency translation														Foreign currency translation	—	—		—		(445)		—		(445)
Balance at September 30, 2022														Balance at September 30, 2022	106,407,769	$	106	$	366,263	$	(1,137)	$	(379,922)	$	(14,690)

															Three Months Ended September 30, 2021
															Common Stock Shares	Common Stock Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total

Balance at June 30, 2021														Balance at June 30, 2021	99,918,941	$	100	$	352,394	$	(171)	$	(367,534)	$	(15,211)
Net income														Net income	—	—		—		—		72,746		72,746
Share-based compensation														Share-based compensation	—	—		3,798		—		—		3,798
Common stock and stock warrants issued for cash														Common stock and stock warrants issued for cash	4,237,290	4		4,610		—		—		4,614
Equity instrument exercises														Equity instrument exercises	85,000	—		56		—		—		56
Common stock issuance upon note payable conversion														Common stock issuance upon note payable conversion	876,493	1		1,104		—		—		1,105
Reclassification of warrant liability to equity														Reclassification of warrant liability to equity	—	—		1,602		—		—		1,602
Foreign currency translation														Foreign currency translation	—	—		—		(9)		—		(9)
Other														Other	(9,000)	—		—		—		—		—
Balance at September 30, 2021														Balance at September 30, 2021	105,108,724	$	105	$	363,564	$	(180)	$	(294,788)	$	68,701

		Three Months Ended March 31, 2022													Nine Months Ended September 30, 2022
		Common Stock Shares		Common Stock Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total			Common Stock Shares	Common Stock Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
Balance at December 31, 2021	Balance at December 31, 2021	105,157,769		$	105	$	364,239	$	(270)	$	(333,040)	$	31,034	Balance at December 31, 2021	105,157,769	$	105	$	364,239	$	(270)	$	(333,040)	$	31,034
Net loss	Net loss	—		—		—		—		(25,429)		(25,429)		Net loss	—	—		—		—		(46,882)		(46,882)
Share-based compensation	Share-based compensation	—		—		514		—		—		514		Share-based compensation	—	—		1,525		—		—		1,525

Common stock issued for services														Common stock issued for services	1,250,000	1		499		—		—		500
Equity instrument exercises														Equity instrument exercises	—	—		—		—		—		—
Foreign currency translation	Foreign currency translation	—		—		—		2		—		2		Foreign currency translation	—	—		—		(867)		—		(867)

Balance at March 31, 2022		105,157,769		$	105	$	364,753	$	(268)	$	(358,469)	$	6,121
Balance at September 30, 2022														Balance at September 30, 2022	106,407,769	$	106	$	366,263	$	(1,137)	$	(379,922)	$	(14,690)

		Three Months Ended March 31, 2021													Nine Months Ended September 30, 2021
		Common Stock Shares		Common Stock Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total			Common Stock Shares	Common Stock Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
Balance at December 31, 2020	Balance at December 31, 2020	99,505,041		$	100	$	351,546	$	(226)	$	(360,512)	$	(9,092)	Balance at December 31, 2020	99,505,041	$	100	$	351,546	$	(226)	$	(360,512)	$	(9,092)
Net loss		—		—		—		—		(5,461)		(5,461)
Net income														Net income	—	—		—		—		65,724		65,724
Share-based compensation	Share-based compensation	—		—		20		—		—		20		Share-based compensation	—	—		3,823		—		—		3,823

Common stock and stock warrants issued for cash														Common stock and stock warrants issued for cash	4,237,290	4		4,610		—		—		4,614
Equity instrument exercises	Equity instrument exercises	411,900		—		821		—		—		821		Equity instrument exercises	498,900	—		879		—		—		879
Common stock issuance upon note payable conversion														Common stock issuance upon note payable conversion	876,493	1		1,104		—		—		1,105
Reclassification of warrant liability to equity														Reclassification of warrant liability to equity	—	—		1,602		—		—		1,602
Foreign currency translation	Foreign currency translation	—		—		—		42		—		42		Foreign currency translation	—	—		—		46		—		46
Balance at March 31, 2021		99,916,941		$	100	$	352,387	$	(184)	$	(365,973)	$	(13,670)
Other														Other	(9,000)	—		—		—		—		—
Balance at September 30, 2021														Balance at September 30, 2021	105,108,724	$	105	$	363,564	$	(180)	$	(294,788)	$	68,701

See Notes to Unaudited Condensed Consolidated Financial Statements


Table of Contents			3			Financial Statement Index

REMARK HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(dollars in thousands)


		Three Months Ended March 31,					Nine Months Ended September 30,
		2022		2021			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net loss	Net loss	$	(25,429)	$	(5,461)	Net loss	$	(46,882)	$	65,724
Adjustments to reconcile net loss to net cash used in operating activities:	Adjustments to reconcile net loss to net cash used in operating activities:					Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of warrant liability	Change in fair value of warrant liability	—		1,610		Change in fair value of warrant liability	—		(123)
Depreciation, amortization and impairments	Depreciation, amortization and impairments	41		66		Depreciation, amortization and impairments	121		150
Share-based compensation	Share-based compensation	429		267		Share-based compensation	1,185		3,497
Amortization of debt issuance costs and discount	Amortization of debt issuance costs and discount	1,095		63		Amortization of debt issuance costs and discount	2,189		312
Finance fee						Finance fee	283		—
Stock issuance for services performed						Stock issuance for services performed	500		—

Loss on investment in marketable securities		19,056		—
Loss on investment						Loss on investment	26,356		(78,917)

Gain on debt extinguishment						Gain on debt extinguishment	—		(425)
Loss on disposal of long-lived assets						Loss on disposal of long-lived assets	—		30

Financing cost of converting note payable to common stock						Financing cost of converting note payable to common stock	—		44
Provision for doubtful accounts						Provision for doubtful accounts	2,278		—
Other	Other	43		37		Other	(178)		20
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	(1,052)		(2,938)		Accounts receivable	1,298		(2,182)
Inventory	Inventory	(146)		(795)		Inventory	(209)		(1,062)
Deferred cost of revenue						Deferred cost of revenue	(5,041)		—
Prepaid expense and other assets	Prepaid expense and other assets	(1,895)		566		Prepaid expense and other assets	3,815		241
Operating lease assets	Operating lease assets	(52)		90		Operating lease assets	63		238
Accounts payable, accrued expense and other liabilities	Accounts payable, accrued expense and other liabilities	(666)		968		Accounts payable, accrued expense and other liabilities	826		2,047
Contract liability	Contract liability	(142)		48		Contract liability	(245)		435
Operating lease liabilities	Operating lease liabilities	30		(49)		Operating lease liabilities	6		(146)
Net cash used in operating activities	Net cash used in operating activities	(8,688)		(5,528)		Net cash used in operating activities	(13,635)		(10,117)
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Proceeds from sale of investment	Proceeds from sale of investment	1,849		—		Proceeds from sale of investment	6,332		2,322
Purchases of property, equipment and software	Purchases of property, equipment and software	(10)		(11)		Purchases of property, equipment and software	(175)		(155)
Payment of amounts capitalized to software in progress	Payment of amounts capitalized to software in progress	(949)		—		Payment of amounts capitalized to software in progress	(999)		—
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	890		(11)		Net cash provided by (used in) investing activities	5,158		2,167
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from issuance of common stock, net	Proceeds from issuance of common stock, net	—		821		Proceeds from issuance of common stock, net	—		5,494
Proceeds from debt issuance	Proceeds from debt issuance	—		4,770		Proceeds from debt issuance	—		4,770
Advances from related parties						Advances from related parties	2,386		—
Repayments of advances from related parties						Repayments of advances from related parties	(1,517)		—
Repayments of debt	Repayments of debt	(3,698)		—		Repayments of debt	(6,203)		—

Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	(3,698)		5,591		Net cash provided by (used in) financing activities	(5,334)		10,264
Net change in cash	Net change in cash	(11,496)		52		Net change in cash	(13,811)		2,314
Cash:	Cash:					Cash:
Beginning of period	Beginning of period	14,187		854		Beginning of period	14,187		854
End of period	End of period	$	2,691	$	906	End of period	$	376	$	3,168

Supplemental cash flow information:	Supplemental cash flow information:					Supplemental cash flow information:
Cash paid for interest	Cash paid for interest	$	1,092	$	—	Cash paid for interest	$	3,238	$	—

Supplemental schedule of non-cash investing and financing activities:	Supplemental schedule of non-cash investing and financing activities:					Supplemental schedule of non-cash investing and financing activities:
Transfer of marketable securities to partially settle notes payable						Transfer of marketable securities to partially settle notes payable	$	9,661	$	—
Finance fee						Finance fee	$	283	$	—
Issuance of common stock upon note payable conversion						Issuance of common stock upon note payable conversion	$	—	$	1,105
Reclassification of warrant liability to equity						Reclassification of warrant liability to equity	$	—	$	1,602
Reclassification of investment to marketable securities						Reclassification of investment to marketable securities	$	—	$	1,030

Accrual of debt issuance cost		$	—	$	285
Change in liability for China Cash Bonuses (Note 12)	Change in liability for China Cash Bonuses (Note 12)	$	84	$	248	Change in liability for China Cash Bonuses (Note 12)	$	340	$	326

See Notes to Unaudited Condensed Consolidated Financial Statements


Table of Contents			4			Financial Statement Index

REMARK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021

NOTE 1. ORGANIZATION AND BUSINESS

Organization and Business

Remark Holdings, Inc. and its subsidiaries (“Remark”, “we”, “us”, or “our”)~~, and the variable-interest entities (“VIEs”) that Remark consolidates,~~ constitute a diversified global technology business with leading artificial intelligence (“AI”) and data-analytics ~~as well as a portfolio of digital media properties.~~solutions. The common stock of Remark Holdings, Inc. is listed on the Nasdaq Capital Market under the ticker symbol MARK.

We ~~and the VIEs~~ primarily sell AI-based products and services. We currently recognize substantially all of our revenue from China, with additional revenue from sales in the U.S.~~, while the VIEs generate substantially all of their revenue from China.~~

Corporate Structure

We are a holding company incorporated in Delaware and not a Chinese operating company. As a holding company, we conduct most of our operations through our subsidiaries, each of which is wholly owned. We have historically conducted a significant part of our operations through ~~our subsidiaries and through~~ contractual arrangements ~~with the VIEs~~between our wholly-foreign-owned enterprise (“WFOE”) and certain variable interest entities (“VIEs”) based in ~~China.We use the VIE structure~~China to address challenges resulting from laws, policies and practices that may disfavor foreign-owned entities that operate within industries deemed sensitive by the Chinese government. We own 100% of the equity of a wholly foreign owned enterprise (“WFOE”), which has entered into contractual arrangements with the VIEs, which are owned by members of our management team in China and/or by third parties.

~~We fund the registered capital and operating expenses of the VIEs on behalf of the shareholders of the VIEs by making advances to the VIEs. We believe that we are~~were the primary beneficiary of the VIEs because the contractual arrangements governing the relationship between the VIEs and our WFOE, which ~~include~~included an exclusive call option agreement, exclusive business cooperation agreement, a proxy agreement and an equity pledge agreement, ~~enable~~enabled us to (i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive call option to purchase, at any time, all or part of the equity interests in and/or assets of the VIEs to the extent permitted by Chinese laws. Because ~~these contractual arrangements with the VIEs provide us with the power to direct the activities of the VIEs, for accounting purposes~~ we ~~are~~were the primary beneficiary of the VIEs, ~~and~~ we ~~have~~ consolidated the financial results of the VIEs in our consolidated financial statements in accordance with ~~U.S.~~ generally accepted accounting principles (“GAAP”).

~~The agreements governing~~We terminated all of the ~~VIE~~ contractual arrangements have not been tested in a court of law. However, an article published in China Business Law Journal indicated that a China International Economic and Trade Arbitration Commission (“CIETAC”) Shanghai tribunal ruled in 2010 and 2011 in two related cases involvingbetween the contractual arrangement of an online game operating company that the contractual arrangement was void on the grounds that such arrangement violated the mandatory administrative regulations prohibiting foreign investors from investing in the online game operation business and constituted “concealing illegal intentions with a lawful form.” According to publicly available information, while the agreements entered into by the parties in the aforementioned CIETAC cases are typical VIE agreements, the PRC domestic company involved in such cases was mainly engaged in online game operation. Although the PRC foreign investment regime restricts or prohibits foreign investment in certain industries, online game operation is one of few industries where there are rules specifically prohibiting foreign investors from controlling and participating in the business indirectly through contractual or technical support arrangements. Though the agreements in the CIETAC cases are similar to our contractual arrangements with the VIEs, weWFOE and the VIEs ~~do not operate in~~and exercised our rights under the ~~online game operation industry~~exclusive call option agreements between the WFOE and ~~to our knowledge, the business conducted by~~ the VIEs ~~is not prohibited from investment from foreign investors in China. We also note~~such that, effective as of September 19, 2022, we obtained 100% of the ~~rulings in~~equity ownership of the ~~CIETAC cases are not binding on Chinese courts or other arbitration tribunals.~~entities we formerly consolidated as VIEs and which we now consolidate as wholly-owned subsidiaries.

The following diagram illustrates our corporate structure, including our significant subsidiaries, ~~and the relationship between our WFOE and the VIEs~~ as of the date of this Form 10-Q. The diagram omits certain entities which are immaterial to our results of operations and financial condition. Equity interests depicted in this diagram are 100% owned. The relationships between each of Chengdu Remark Technology Co., Ltd., Hangzhou Shufeng Technology Co., Ltd., Remark Data Technology Co., Ltd. and Bonet (Beijing) Technology LLC, which constitute the VIEs, on the one hand, and KanKan Technology (Shanghai) Co., Ltd., our WFOE, on the other hand, as illustrated in the following diagram are governed by contractual arrangements and do not constitute equity ownership.


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Because we do not directly hold equity interests in the VIEs, we are subject to risks and uncertainties of the interpretations and applications of Chinese laws and regulations, including but not limited to, the validity and enforcement of the contractual arrangements among the WFOE, the VIEs and the shareholders of the VIEs. We are also subject to the risks and uncertainties about any future actions of the Chinese government in this regard that could disallow the VIE structure, which would likely result in a material change in our operations and may cause the value of our common stock to depreciate significantly or become worthless.


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The contractual arrangements may not be as effective as direct ownership in providing operational control and we face contractual exposure in such arrangements. For instance, the VIEs and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. The shareholders of the VIEs may not act in the best interests of our Company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business through the contractual arrangements with the VIEs. In the event that the VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. In addition, even if legal actions are taken to enforce such arrangements, there is uncertainty as to whether Chinese courts would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.

~~Risks of Doing Business in China~~

We are subject to certain legal and operational risks associated with having a significant portion of our operations in China. Chinese laws and regulations governing our current business operations, including the enforcement of such laws and regulations, are sometimes vague and uncertain and can change quickly with little advance notice. The Chinese government may intervene in or influence ~~our operations and~~ the operations of ~~the VIEs~~our China-based subsidiaries at any time and may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our securities. In addition, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could ~~significant~~significantly limit or completely hinder our ability to offer or continue to offer our securities to investors and cause the value of such securities to


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significantly decline or become worthless. ~~Recently,~~In recent years, the Chinese government adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to the use of variable interest entities, cybersecurity, data security, export control and anti-monopoly concerns. As of the date of this Form 10-Q, ~~neither~~ we ~~nor the VIEs~~ have neither been involved in any investigations on cybersecurity review initiated by any Chinese regulatory authority, nor ~~has any of them~~ received any inquiry, notice or sanction. As of the date of this Form 10-Q, no relevant laws or regulations in China explicitly require us to seek approval from the China Securities Regulatory Commission ~~(the “CSRC”~~(“CSRC”) for any securities listing. As of the date of this Form 10-Q, ~~neither~~ we ~~nor the VIEs~~ have not received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other Chinese governmental authorities relating to securities listings. However, since these statements and regulatory actions are newly published, official guidance and related implementation rules have not all been issued. It is highly uncertain what potential impact such modified or new laws and regulations will have on our ability to conduct our business, accept investments or list or maintain a listing on a U.S. or foreign exchange.

As of the date of this Form 10-Q, we ~~and the VIEs~~ are not required to seek permissions from the CSRC, the Cyberspace Administration of China (the “CAC”), or any other entity that is required to approve ~~of the~~our operations ~~of the VIEs.~~in China. Nevertheless, Chinese regulatory authorities may in the future promulgate laws, regulations or implement rules that require us or our subsidiaries ~~or the VIEs~~ to obtain permissions from such regulatory authorities to approve ~~the~~our operations ~~of the VIEs~~ or any securities listing.

Holding Foreign Companies Accountable Act

The Holding Foreign Companies Accountable Act (the “HFCA Act”) was enacted on December 18, 2020. The HFCA Act states if the Securities and Exchange Commission (the “SEC”) determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the Public Company Accounting Oversight Board (the “PCAOB”) for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market in the United States. On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two. On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction. On December 16, 2021, the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in China and in Hong Kong because of positions taken by Chinese and Hong Kong authorities in those jurisdictions. The PCAOB has made such determination as mandated under the HFCA Act. Pursuant to each annual determination by the PCAOB, the SEC will, on an annual basis, identify issuers that have used non-inspected audit firms and thus are at risk of such suspensions in the future.

On August 26, 2022, the CSRC, the Ministry of Finance of the PRC, and the PCAOB signed a Statement of Protocol (the “Protocol”), taking the first step toward opening access for the PCAOB to completely inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. Pursuant to the Protocol, the PCAOB shall have independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the SEC. However, uncertainties still exist as to compliance with the Protocol. Depending on the implementation of the Protocol, if the PCAOB continues to be prohibited from conducting complete inspections and investigations of PCAOB-registered public accounting firms in China, then China-based companies will be delisted pursuant to the HFCA Act despite the Protocol. Therefore, there is no assurance that the Protocol could give relief to China-based companies against the delisting risk from the application of the HFCA Act.

Our auditor, Weinberg & Company, an independent registered public accounting firm headquartered in the United States, is not subject to the determinations announced by the PCAOB on December 16, 2021. Our auditor is currently subject to PCAOB inspections and has been inspected by the PCAOB on a regular basis. However, if the PCAOB is unable to inspect the work papers of our accounting firm in the future, such lack of inspection could cause trading in our common stock to be prohibited under the HFCA Act, and as a result, an exchange may determine to delist our common stock. The delisting and the cessation of trading of our common stock, or the threat of our common stock being delisted and prohibited from being traded, may materially and adversely affect the value of your investment.


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Transfer of Cash or Assets

Dividend Distributions

As of the date of this Form 10-Q, none of our subsidiaries ~~or any of the consolidated VIEs~~ have made any dividends or distributions to ~~us.~~Remark.

We have never declared or paid dividends or distributions on our common equity. We currently intend to retain all available funds and any future consolidated earnings to fund our operations and continue the development and growth of our business; therefore, we do not anticipate paying any cash dividends.

Under Delaware law, a Delaware corporation’s ability to pay cash dividends on its capital stock requires the corporation to have either net profits or positive net assets (total assets less total liabilities) over its capital. If we determine to pay dividends on any of our common stock in the future, as a holding company, we may rely on dividends and other distributions on equity from our ~~WFOE~~subsidiaries for cash requirements, including the funds necessary to pay dividends and other cash contributions to our stockholders.


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Our WFOE’s ability to distribute dividends is based upon its distributable earnings. Current Chinese regulations permit our WFOE to pay dividends to ~~their shareholders~~its shareholder only out of its registered capital amount, if any, as determined in accordance with Chinese accounting standards and regulations, and then only after meeting the requirement regarding statutory ~~reserve equal to 50% of registered capital.~~reserve. If our WFOE incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Any limitation on the ability of our WFOE to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business. In addition, any cash dividends or distributions of assets by our WFOE to its stockholder are subject to a Chinese withholding tax of as much as 10%.

The Chinese government also imposes controls on the conversion of ~~RMB~~Chinese Renminbi (“RMB”) into foreign currencies and the remittance of currencies out of China. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. If we are unable to receive all of the revenues from our operations through ~~the current VIE contractual arrangements,~~our China-based subsidiaries, we may be unable to pay dividends on our common stock.

For us to pay dividends to our stockholders, we will rely on payments made from the VIEs to our WFOE in accordance with the VIE contractual arrangements, and the distribution of payments from the WFOE to the Delaware holding company as dividends. Certain payments from the VIEs to the WFOE pursuant to the VIE contractual arrangements are subject to Chinese taxes, including a 6% VAT and 25% enterprise income tax.

~~Our Company’s Ability to Settle Amounts Owed under the VIE Contractual Arrangements~~

Under the VIE contractual arrangements, the VIEs are obligated to make payments to our WFOE, in cash or in kind, at the WFOE’s request. We will be able to settle amounts owed under the VIE contractual arrangements through dividends paid by our WFOE to our Company. Such ability may be restricted or limited as follows:

~~First, any payments from the VIEs to our WFOE are subject to Chinese taxes, including a 6% VAT and 25% enterprise income tax.~~

Second, current Chinese regulations permit our WFOE to pay dividends to their shareholders only out of its registered capital amount, if any, as determined in accordance with Chinese accounting standards and regulations, and then only after meeting the statutory reserve equal to 50% of registered capital. In addition, if our WFOE incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to the Delaware holding company.

Third, the Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from profits, if any.

COVID-19

Our consolidated financial statements for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 were impacted by the effects of the COVID-19 pandemic. The response to the COVID-19 pandemic will likely continue to adversely affect our business and financial results, as could economic and geopolitical conditions in some international regions, and we do not yet know what will be the ultimate effects on our business. The COVID-19 pandemic caused a broad shift towards remote working arrangements for many businesses worldwide and injected uncertainty and delay into decision-making processes for such businesses. Varying degrees of preventative measures are still in place in China and other parts of the world, including city-wide lockdowns, travel restrictions, closures of non-essential businesses and other quarantine measures. In particular, the preventative measures in China as a result of the Chinese government’s “Zero-COVID” policy have significantly limited the operational capabilities of ~~the VIEs.~~our China-based subsidiaries. Many cities across large swaths of China have recently been fully or partially locked down for weeks or even months, including economically significant regions such as Shanghai. Such lockdowns have had a material adverse impact on our business, including on the collection of our accounts receivable, and we expect them to continue to have a material adverse impact on our business ~~at least through the second quarter of 2022.~~until their imposition is ceased.


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The full extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including resurgences and further spread of existing or new COVID-19 variants, the duration of any remaining preventative measures implemented by domestic and foreign governments, the impact on capital and financial markets and the related impact on the financial circumstances of our customers, all of which are highly uncertain and cannot be predicted. The pandemic-related situation continues to change rapidly, and additional impacts of which we are not currently aware may arise. We are closely monitoring worldwide developments and are continually assessing the potential impact on our business.


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Going Concern

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, and in each fiscal year since our inception, we have incurred operating losses which have resulted in ~~an accumulated~~a stockholders’ deficit of ~~$358.5~~$14.7 million ~~within stockholders’ equity~~ as of ~~March 31,~~September 30, 2022. Additionally, our operations have historically used more cash than they have provided. Subsequent to September 30, 2022, we did not make the required repayment of the outstanding loans under the Mudrick Loan Agreements by October 31, 2022, the maturity date. This constitutes an event of default for which we have not received a waiver as of the date of this Form 10-Q. Net cash used in operating activities was ~~$8.7~~$13.6 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2022. As of ~~March 31,~~September 30, 2022, our cash balance was ~~$2.7~~$0.4 million.

Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities give rise to, and management has concluded that there is, substantial doubt regarding our ability to continue as a going concern. Our independent registered public accounting firm, in its report on our consolidated financial statements for the year ended December 31, 2021, has also expressed substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We intend to fund our future operations and meet our financial obligations through revenue growth from our AI ~~offerings, as well as through sales of our thermal-imaging products.~~and data analytics offerings. We cannot, however, provide assurance that revenue, income and cash flows generated from our businesses will be sufficient to sustain our operations in the twelve months following the filing of this Form 10-Q. As a result, we are actively evaluating strategic alternatives including debt and equity ~~financings and potential sales of investment assets.~~financings.

Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (in particular, as a result of the COVID-19 pandemic, global supply chain disruptions, inflation and other cost increases, and the geopolitical conflict in Ukraine), will play primary roles in determining whether we can successfully obtain additional capital. We cannot be certain that we will be successful at raising additional capital.

A variety of factors, many of which are outside of our control, affect our cash flow; those factors include the effects of the COVID-19 pandemic, regulatory issues, competition, financial markets and other general business conditions. Based on financial projections, we believe that we will be able to meet our ongoing requirements for at least the next 12 months with existing cash and based on the probable success of one or more of the following plans:

•develop and grow new product line(s)

•~~monetize existing assets~~

•obtain additional capital through debt and/or equity issuances.

However, projections are inherently uncertain and the success of our plans is largely outside of our control. As a result, there is substantial doubt regarding our ability to continue as a going concern, and we may fully utilize our cash resources prior to ~~May 16, 2023.~~December 31, 2022.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of ~~March 31,~~September 30, 2022, with the audited Consolidated Balance Sheet amounts as of December 31, 2021 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


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annual consolidated financial statements prepared in accordance with U.S. GAAP, though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.

Our results of operations and our cash flows as of the end of the interim periods reported herein do not necessarily indicate the results we may experience for the remainder of the year or for any other future period.

Management believes that we have included all adjustments (including those of a normal, recurring nature) considered necessary to fairly present our unaudited Condensed Consolidated Balance Sheet and our unaudited Condensed Consolidated


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Statement of Stockholders’ Deficit, each as of ~~March 31,~~September 30, 2022, as well as our unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss and Condensed Consolidated Statements of Cash Flows for all periods presented. You should read our unaudited condensed consolidated interim financial statements and footnotes in conjunction with our consolidated financial statements and footnotes included within the Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).

Consolidation

We include all of our subsidiaries ~~and the VIEs~~ in our condensed consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.

Use of Estimates

We prepare our consolidated financial statements in conformity with GAAP. While preparing our financial statements, we make estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and accompanying notes. Accordingly, actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, share-based compensation, deferred income taxes, and inventory reserve, among other items.

The impact of the COVID-19 pandemic continues to unfold. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.

Cash

Our cash consists of funds held in bank accounts.

We maintain cash balances in United States dollars (“USD”) ~~and~~, British pounds (“GBP”), ~~while the VIEs maintain cash balances in USD, Chinese Renminbi (“RMB”)~~RMB and Hong Kong dollars (“HKD”). The following table, reported in USD, disaggregates our cash balances by currency denomination (in thousands):


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Cash denominated in:	Cash denominated in:					Cash denominated in:
USD	USD	$	2,161	$	13,278	USD	$	5	$	13,278
RMB	RMB	103		259		RMB	199		259
GBP	GBP	422		644		GBP	166		644
HKD	HKD	5		6		HKD	6		6
Total cash	Total cash	$	2,691	$	14,187	Total cash	$	376	$	14,187

We maintain substantially all of our USD-denominated cash at a U.S. financial institution where the balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At times, however, our cash balances may exceed the ~~FDIC-~~


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~~insured~~FDIC-insured limit. As of ~~March 31,~~September 30, 2022, we do not believe we have any significant concentrations of credit ~~risk, although approximately $1.8 million of our USD-denominated cash balance exceeded the FDIC-insured limit.~~risk. Cash held by our non-U.S. subsidiaries ~~and the VIEs~~ is subject to foreign currency fluctuations against the USD, although such risk is somewhat mitigated because we transfer U.S. funds to China to fund local operations. If, however, the USD is devalued significantly against the RMB, our cost to further develop our business in China could exceed original estimates.


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Marketable Securities

Investment in marketable securities consists of marketable equity securities. We classify marketable securities as current or noncurrent based on the nature of the securities and their availability for use in current operations. Marketable securities are stated at fair value with all realized and unrealized gains and losses recognized in our Statement of Operations. The realized and unrealized gains and losses on marketable securities are determined using the specific identification method and quoted prices in an active market.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price). When reporting the fair values of our financial instruments, we prioritize those fair value measurements into one of three levels based on the nature of the inputs, as follows:

Level 1: Valuations based on quoted prices in active markets for identical assets and liabilities;

Level 2: Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and observable market data for similar, but not identical instruments; and

Level 3: Valuations based on unobservable inputs, which are based upon the best available information when external market data is limited or unavailable.

The fair value hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. For some products or in certain market conditions, observable inputs may not be available.

We believe the reported carrying amounts for cash, marketable securities, receivables, prepaids and other current assets, accounts payable, accrued expense and other current liabilities, and short-term debt approximate their fair values because of the short-term nature of these financial instruments.

Foreign Currency Translation

We report all currency amounts in USD. ~~The VIEs,~~Our overseas subsidiaries, however, maintain their books and records in their functional ~~currency,~~currencies, which ~~is RMB.~~are GBP in the United Kingdom (“U.K.”) and RMB in China.

In general, when consolidating our subsidiaries ~~or the VIEs~~ with non-USD functional currencies, we translate the amounts of assets and liabilities into USD using the exchange rate on the balance sheet date, and the amounts of revenue and expense are translated at the average exchange rate prevailing during the period. The gains and losses resulting from translation of financial statement amounts into USD are recorded as a separate component of accumulated other comprehensive loss within stockholders’ deficit.


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We used the exchange rates in the following table to translate amounts denominated in non-USD currencies as of and for the periods noted:


		2022	2021		2022	2021
Exchange rates at March 31st:
Exchange rates at September 30th:				Exchange rates at September 30th:
GBP:USD	GBP:USD	1.313	—	GBP:USD	1.113	—
RMB:USD	RMB:USD	0.158	0.152	RMB:USD	0.141	0.155
HKD:USD	HKD:USD	0.128	0.129	HKD:USD	0.127	0.129

Average exchange rate during the three months ended March 31st:
Average exchange rate during the nine months ended September 30th:				Average exchange rate during the nine months ended September 30th:
RMB:USD	RMB:USD	0.158	0.154	RMB:USD	0.152	0.156
GBP:USD	GBP:USD	1.317	—	GBP:USD	1.259	—

Revenue Recognition

AI-Based Products

We ~~and the VIEs~~ generate revenue by developing AI-based products, including fully-integrated AI solutions which combine our proprietary technology with third-party hardware and software products to meet end-user specifications. Under one type of contract for our AI-based products, we provide a single, continuous service to clients who control the assets as we create them. Accordingly, we recognize the revenue over the period of time during which we provide the service. Under another type of contract, we have performance obligations to provide fully-integrated AI solutions to our customer and we recognize revenue at the point in time when each performance obligation is completed and delivered to, tested by and accepted by our customer.

We recognize revenue when we transfer control of the promised goods or services to our customers, and we recognize an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. If there is uncertainty related to the timing of collections from our customer, which may be the case if our customer is not the ultimate end user of our goods, we consider this to be uncertainty of the customer’s ability and intention to pay us when consideration is due. Accordingly, we recognize revenue only when we have transferred control of the goods or services and collectability of consideration from the customer is probable.

When customers pay us prior to when we satisfy our obligation to transfer control of promised goods or services, we record the amount that reflects the consideration to which we expect to be entitled as a contract liability until such time as we satisfy our performance obligation.

For contracts under which we have not yet completed the performance obligation, deferred costs are recorded for any amounts incurred in advance of the performance obligation.

For our contracts with customers, we generally extend short-term credit policies to our customers, typically up to one year for large-scale projects.

We record the incremental costs of obtaining contracts as an expense when incurred.

We ~~and the VIEs~~ offer extended warranties on our products for periods of one to three years. Revenue from these extended warranties is recognized on a straight-line basis over the warranty contract term.

Other

We generate revenue from other sources, such as from advertising and marketing services or e-commerce activity in which we sell goods to our customers. We recognize the revenue from these contracts at the point in time when we transfer control of


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the good sold to the customer or when we deliver the promised promotional materials or media content. Substantially all of our contracts with customers that generate Other revenue are completed within one year or less.


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Inventory

We ~~and the VIEs~~ use the first-in first-out method to determine the cost of our inventory, then we report inventory at the lower of cost or net realizable value. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated sales forecasts. At ~~March 31,~~September 30, 2022 and December 31, 2021, reserve for inventory was $0.9 million and $1.0 million, respectively.

Internal Use Software

We acquire or develop applications and other software that help us meet our internal needs with respect to operating our business. For such projects, planning cost and other costs related to the preliminary project stage, as well as costs incurred for post-implementation activities, are expensed as incurred. We capitalize costs incurred during the application development phase only when we believe it is probable the development will result in new or additional functionality. The types of costs capitalized during the application development phase include fees incurred with third parties for consulting, programming and other development activities performed to complete the software. We amortize our internal use software on a straight-line basis over an estimated useful life of three years. If we identify any internal use software to be abandoned, the cost less the accumulated amortization, if any, is recorded as amortization expense. Once we have fully amortized internal use software costs that we capitalized, we remove such amounts from their respective accounts.

Net Income (Loss) per Share

We calculate basic net income (loss) per share using the weighted-average number of common stock shares outstanding during the period. For the calculation of diluted net income (loss) per share, we give effect to all the shares of common stock that were outstanding during the period plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is anti-dilutive. Dilutive potential shares of common stock consist of incremental shares of common stock issuable upon exercise of stock options and warrants.

For the three and nine months ended ~~March 31,~~September 30, 2022 and 2021, there were no reconciling items related to ~~either~~ the ~~numerator or~~numerators of the net income (loss) per share calculations. The following table presents a reconciliation of the denominator of the ~~loss~~basic net income (loss) per share calculation ~~as their effect would have been anti-dilutive.~~to that of the diluted net income (loss) per share calculation (in thousands):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
Weighted-average shares outstanding, basic	105,290,553	100,140,650	105,290,553	100,087,288
Incremental shares resulting from assumed exercises of in-the-money stock options	—	238,883	—	322,362
Weighted-average shares outstanding, diluted	105,290,553	100,379,533	105,290,553	100,409,650

Securities which may have affected the calculation of diluted earnings per share for the ~~years~~three and nine months ended ~~March 31,~~September 30, 2022 ~~and 2021~~ if their effect had been dilutive include ~~14,330,565 and 9,528,965~~15,123,752 outstanding stock options ~~respectively,~~ and 10,114,408 ~~and 40,000~~ outstanding ~~stock~~ warrants ~~respectively.~~to purchase common stock.


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Segments

Existing GAAP, which establishes a management approach to segment reporting, defines operating segments as components of an entity about which separate, discrete financial information is available for evaluation by the chief operating decision maker. We have identified our Chief Executive Officer as our chief operating decision maker, who reviews operating results to make decisions about allocating resources and assessing performance based upon only 1one operating segment.

Recently Issued Accounting Pronouncements

In ~~August 2020,~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2020-06~~2016-13 (“ASU ~~2020-06”~~2016-13”),Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception


~~Table of Contents~~			13			~~Financial Statement Index~~

from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The ASU also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. With regard to our financial reporting, ASU 2020-06 will be effective January 1, 2024, and early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. We are currently evaluating what effect(s) the adoption of ASU 2020-06 may have on our consolidated financial statements, but we do not believe the impact of the ASU will be material to our financial position, results of operations and cash flows. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.

~~In June 2016, the FASB issued ASU 2016-13,~~ Measurement of Credit Losses on Financial Instruments (Topic 326). The ASU requires entities to use a forward-looking approach based on current expected credit losses to estimate credit losses on certain types of financial instruments, including trade receivables, which may result in the earlier recognition of allowances for losses. With regard to our financial reporting, ASU 2016-13 will be effective beginning January 1, 2023, and early adoption is permitted. We do not believe the impact of the ASU will be material to our financial position, results of operations and cash flows.

We have reviewed all accounting pronouncements recently issued by the FASB and the SEC. The authoritative pronouncements that we have already adopted did not have a material effect on our financial condition, results of operations, cash flows or reporting thereof, and except as otherwise noted above, we do not believe that any of the authoritative pronouncements that we have not yet adopted will have a material effect upon our financial condition, results of operations, cash flows or reporting thereof.

NOTE 3. CONCENTRATION OF RISK

Revenue and Accounts Receivable

The disaggregation of revenue tables in Note 4 demonstrate the concentration in our revenue from certain products and the geographic concentration of our business. We also have a concentration in the volume of business we transacted with customers, as during the nine months ended September 30, 2022, two of our customers represented about 55% and 23%, respectively, of our revenue, while during nine months ended September 30, 2021, our two largest customers represented about 32% and 21%, respectively, of our revenue. At September 30, 2022, accounts receivable from two of our customers represented about 32% and 18%, respectively, of our gross accounts receivable, while at December 31, 2021, accounts receivable from our three largest customers represented about 25%, 24% and 10%, respectively, of our gross accounts receivable.

NOTE 3.4. REVENUE

We ~~and the VIEs~~ primarily sell AI-based products and ~~services. In the U.S., that includes our Remark AI Thermal Kits and rPads, while the VIEs sell various customized products in China~~services based upon computer vision and other technologies.

We do not include disclosures related to remaining performance obligations because substantially all our contracts with customers have an original expected duration of one year or less or, with regard to our stand-ready obligations, the amounts involved are not material.

~~Disaggregation of Revenue~~

~~The following table presents a disaggregation of our revenue by category of products and services (in thousands):~~

Three Months Ended March 31,
2022 2021
AI-based products and services, including $2.2 million from China Business Partner (See Note 13)
$ 4,546 $ 4,020
Other 121 386
Revenue $ 4,667 $ 4,406

~~The following table presents a disaggregation of our revenue by country (in thousands):~~

Three Months Ended March 31,
2022 2021
China $ 4,554 $ 4,020
United States 113 386
Revenue $ 4,667 $ 4,406


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Disaggregation of Revenue

The ~~VIEs generated substantially all of the revenue from China noted in the~~following table ~~above, though one~~presents a disaggregation of our ~~subsidiaries generated amounts~~revenue by category of products and services (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
AI-based products and services, including amounts from China Business Partner in 2022 (See Note 15)	$	2,681	$	834	$	9,699	$	8,706
Other	131		400		338		950
Revenue	$	2,812	$	1,234	$	10,037	$	9,656

The following table presents a disaggregation of our revenue ~~from China that were not material in each period.~~by country (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
China	$	2,746	$	840	$	9,815	$	6,053
United States	66		394		222		3,603

Revenue	$	2,812	$	1,234	$	10,037	$	9,656

Significant Judgments

When accounting for revenue we make certain judgments, such as whether we act as a principal or as an agent in transactions or whether our contracts with customers fall within the scope of current GAAP regarding revenue, that affect the determination of the amount and timing of our revenue from contracts with customers. Based on the current facts and circumstances related to our contracts with customers, none of the judgments we make involve an elevated degree of qualitative significance or complexity such that further disclosure is warranted in terms of their potential impact on the amount and timing of our revenue.

Contract Assets and Contract Liabilities

We do not currently generate material contract assets. During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, our contract liability changed only as a result of routine business activity.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, the amount of revenue we recognized that was included in the beginning balance of Contract liability was not material.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, we did not recognize revenue from performance obligations that were satisfied in previous periods.

NOTE 4.5. TRADE ACCOUNTS RECEIVABLE

March 31, 2022 December 31, 2021
Gross accounts receivable balance $ 12,563 $ 11,551
Allowance for bad debt (1,270) (1,284)
Accounts receivable, net $ 11,293 $ 10,267

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 the VIEs’ AI projects, including $2.7 million of trade receivables from projects related to work with our China Business Partner (see ~~Note 13~~ ~~for more information regarding our China Business Partner and related accounting), represent 99% of our gross trade receivables.~~




	September 30, 2022		December 31, 2021
Gross accounts receivable balance	$	9,184	$	11,551
Allowance for bad debt	(3,431)		(1,284)
Accounts receivable, net	$	5,753	$	10,267


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Generally, it is not unusual for Chinese entities to pay their vendors on longer timelines than the timelines typically observed in U.S. commerce. However, as a result of the ongoing lockdowns related to China’s Zero-COVID policy, we have had to re-evaluate the amounts receivable from customers based on recent information and, as a result, we increased our reserve for doubtful accounts by $2.3 million.Trade receivables related to our China-based subsidiaries AI projects, including $3.0 million of trade receivables from projects related to work with our China Business Partner (see Note 15 for more information regarding our China Business Partner and related accounting), represent 99% of our gross trade receivables.

NOTE 5.6. INVESTMENT

In 2009, we co-founded a U.S.-based venture, Sharecare, Inc. (“Legacy Sharecare”), to build a web-based platform that simplifies the search for health and wellness information. The other co-founders of Legacy Sharecare were Dr. Mehmet Oz, HARPO Productions, Discovery Communications, Jeff Arnold and Sony Pictures Television. At December 31, 2021, we reported our $1.0 million investment in Legacy Sharecare as an investment in unconsolidated affiliate.

On July 1, 2021, Legacy Sharecare completed a business combination with Falcon Capital Acquisition Corp., a special purpose acquisition company, as a result of which the common stock of the surviving entity of such business combination (“New Sharecare”) became listed on the Nasdaq Stock Market LLC. In connection with the completion of such business combination, the shares of common stock of Legacy Sharecare that we held immediately prior to the business combination converted into approximately $2.3 million in cash and approximately 9.4 million shares of common stock of New Sharecare. We do not maintain a seat on the board of directors of New Sharecare. The cash received was recorded as a realized gain on the investment, and the investment is revalued at fair value at the end of each reporting period using the closing sales price of the shares on the principal securities exchange on which such shares are then traded.

As of ~~March 31, 2022 and~~ December 31, 2021, the value of our ~~investment in~~9,431,920 shares of common stock of New Sharecare was ~~$21.4 million and~~ $42.3 million ~~respectively,~~ based upon the closing stock price of New Sharecare, an input we classify in Level 1 of the fair value ~~hierarchy, on such dates.~~hierarchy. We sold ~~750,000~~3,181,920 shares of New Sharecare during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 for cash of ~~$1.8~~$6.3 million.

On July 2, 2022, we received a Notice of Trigger Event and Mandatory Payment from our senior lenders, which required that we make a prepayment of our senior secured loans (which are described in Note 11) by delivering to each lender shares of common stock of New Sharecare in the fair market amount applicable to each such lender to prepay our senior secured loans. On July 11, 2022, we delivered our remaining 6,250,000 shares of New Sharecare, which reduced the outstanding principal amount on our senior secured loans by approximately $9.7 million, and as a result, we no longer own any equity interests in New Sharecare as of such date.

The total net loss on investment during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 was ~~as follows:~~

~~Realized loss~~

~~1,518~~

~~Unrealized loss~~

~~17,538~~

~~Total loss~~

~~19,056~~

$26.4 million.

NOTE 6.7. PREPAID EXPENSE AND OTHER CURRENT ASSETS

The following table presents the components of prepaid expense and other current assets (in thousands):


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Receivable from China Business Partner		$	—	$	3,980
Deferred cost of revenue		4,764		589
Receivable from China Business Partner (See Note 15)						Receivable from China Business Partner (See Note 15)	$	—	$	3,980

Other receivables	Other receivables	1,850		9		Other receivables	7		9
Prepaid expense	Prepaid expense	1,396		1,558		Prepaid expense	1,285		1,558
Deposits	Deposits	257		221		Deposits	252		221

Other current assets	Other current assets	6		6		Other current assets	6		6
Total	Total	$	8,273	$	6,363	Total	$	1,550	$	5,774


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NOTE 7.8. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands, except estimated lives):


		Estimated Life (Years)	March 31, 2022		December 31, 2021			Estimated Life (Years)	September 30, 2022		December 31, 2021
Vehicles							Vehicles	3	$	153	—
Computers and equipment	Computers and equipment	3	1,140		1,133		Computers and equipment	3	1,132		$	1,133
Furniture and fixtures	Furniture and fixtures	3	42		42		Furniture and fixtures	3	42		42
Software	Software	3	5,068		5,055		Software	3	4,886		5,055
Leasehold improvements	Leasehold improvements	3	195		196		Leasehold improvements	3	203		196
Software development in progress	Software development in progress		1,085		128		Software development in progress		1,136		128
Total property, equipment and software	Total property, equipment and software		$	7,530	$	6,554	Total property, equipment and software		$	7,552	$	6,554
Less accumulated depreciation	Less accumulated depreciation		(6,256)		(6,197)		Less accumulated depreciation		(6,148)		(6,197)
Total property, equipment and software, net	Total property, equipment and software, net		$	1,274	$	357	Total property, equipment and software, net		$	1,404	$	357

For the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, ~~there was a de minimis amount of~~ depreciation (and amortization of software) expense ~~and~~was $0.1 million ~~of depreciation (and amortization of software) expense,~~and $0.2 million, respectively.

NOTE 8.9. LEASES

We ~~and the VIEs~~ lease office space under contracts we classify as operating leases. None of our leases are financing leases.

The following table presents the detail of our lease expense, which is reported in General and administrative expense (in thousands):


		Three Months Ended March 31,			Three Months Ended September 30,						Nine Months Ended September 30,
			2022			2021			2022		2021		2022		2021
Operating lease expense	Operating lease expense		$	72		$	355	Operating lease expense	$	65	$	73	$	206	$	236
Short-term lease expense	Short-term lease expense		437			7		Short-term lease expense	430		182		1,211		812

Lease expense	Lease expense		$	509		$	362	Lease expense	$	495	$	255	$	1,417	$	1,048

We reported within operating cash flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, $0.2 million and ~~$0.1~~$0.2 million, respectively, of cash paid for amounts included in the measurement of operating lease liabilities.

As of ~~March 31,~~September 30, 2022, our operating leases had a weighted-average remaining lease term of approximately 1613 months, and we used a weighted-average discount rate of approximately 13% to measure our operating lease liabilities.


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Maturity of Lease Liabilities

The following table presents information regarding the maturities of undiscounted remaining operating lease payments, with a reconciliation to the amount of the liabilities representing such payments as presented in our ~~March 31,~~September 30, 2022 Consolidated Balance Sheet (in thousands):


Operating lease liabilities maturing during the next:
One year	$	~~228~~116
Two years	5926




Total ~~undiscounted cash flows~~lease payments	$	~~287~~ 142
Less: Imputed interest/present value discount	(9)
Present value of cash flows	$	~~264~~133

Lease liabilities on balance sheet:
Short-term (included in accrued expenses - Note 10)	$	~~209~~108
Long-term	5525
Total lease liabilities	$	~~264~~133

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.

NOTE 9.10. ACCRUED EXPENSE AND OTHER CURRENT LIABILITIES

The following table presents the components of Accrued expense and other current liabilities (in thousands):


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Accrued compensation and benefit-related expense	Accrued compensation and benefit-related expense	$	629	$	821	Accrued compensation and benefit-related expense	$	1,109	$	821
Accrued interest	Accrued interest	374		385		Accrued interest	713		385
Other accrued expense	Other accrued expense	1,336		1,673		Other accrued expense	1,368		1,073
Other payables	Other payables	2,299		2,324		Other payables	2,145		2,324
Registration rights agreement penalty (see Note 12)						Registration rights agreement penalty (see Note 12)	800		600
Operating lease liability - current	Operating lease liability - current	209		187		Operating lease liability - current	108		187
China Cash Bonuses		354		439
China Cash Bonuses (see N ote 13)						China Cash Bonuses (see N ote 13)	99		439
Other current liabilities	Other current liabilities	—		134		Other current liabilities	228		134
Total	Total	$	5,201	$	5,963	Total	$	6,570	$	5,963


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NOTE ~~10. DEBT~~11. NOTES PAYABLE (IN DEFAULT)

~~Short-Term Debt~~

The following table presents our notes payable (in thousands) as of:


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Principal balance of Mudrick Loans	Principal balance of Mudrick Loans	$	26,303	$	30,000	Principal balance of Mudrick Loans	$	14,418	$	30,000
Unamortized discount and debt issuance cost	Unamortized discount and debt issuance cost	(1,095)		(2,189)		Unamortized discount and debt issuance cost	—		(2,189)
Notes payable, net of unamortized discount and debt issuance cost	Notes payable, net of unamortized discount and debt issuance cost	$	25,208	$	27,811	Notes payable, net of unamortized discount and debt issuance cost	$	14,418	$	27,811

On December 3, 2021, we entered into senior secured loan agreements (the “Original Mudrick Loan Agreements” and as amended by the First Amendment (as defined below), the “Mudrick Loan Agreements”) with certain of our subsidiaries as guarantors (the “Guarantors”) and certain institutional lenders affiliated with Mudrick Capital Management, LP (collectively, “Mudrick”), pursuant to which Mudrick extended credit to us consisting of term loans in the aggregate principal amount of $30.0 million ~~(the~~(as amended, the “Mudrick Loans”). The Mudrick Loans, as amended, bear interest at 18.5% per annum (originally 16.5% per ~~annum,~~annum), which ~~shall be~~is payable on the last business day of each ~~month commencing on December 31, 2021.~~month. All amounts outstanding under the Mudrick Loans, as amended, including all accrued and unpaid interest, will be due and payable in full on October 31, 2022 (originally due on July 31, ~~2022.~~2022). To secure the payment and performance of the obligations under the Mudrick Loan Agreements, we, together with the Guarantors, have granted to TMI Trust Company, as the collateral agent for the benefit of Mudrick, a first priority lien on, and security interest in, all assets of Remark and the Guarantors, subject to certain customary exceptions. The Mudrick Loan Agreements contain representations, warranties, events of default, indemnifications and other provisions customary for financings of this type. The occurrence of any event of default under the Mudrick Loan Agreements may result in the principal amount outstanding and unpaid interest thereon becoming immediately due and payable.

In connection with our entry into the Mudrick Loan Agreements, we paid to Mudrick an upfront fee equal to 5.0% of the amount of the Mudrick Loans, which amount was netted against the drawdown of the Mudrick ~~Loans and~~Loans. We recorded the upfront fee as a debt discount of $1.5 million, and recorded debt issuance cost totaling $1.1 million. We ~~are amortizing~~amortized the discount on the Mudrick Loans and the debt issuance cost over the life of the Mudrick Loans and, during the ~~three~~nine months ended ~~March 31,~~September 30, 2022, we amortized ~~$1.1~~$2.2 million of such discount and debt issuance cost. ~~See~~

On August 3, 2022, we entered into a First Amendment to the Original Mudrick Loan Agreements (the “First Amendment”), pursuant to which, Mudrick agreed, among other things, to (i) waive certain existing events of default under the Mudrick Loan Agreements, (ii) extend the original July 31, 2022 maturity date to October 31, 2022 (provided, however, that if we prepay the principal amount of the loans in an amount of at least $5 million, the maturity date will be automatically extended to November 30, 2022), and (iii) defer payment of interest for the month of July 2022 to August 31, 2022. In addition, on and after the effective date of the First Amendment, the outstanding loans under the Mudrick Loan Agreements will bear interest at 18.5% per annum, payable on the last business day of each month commencing on August 31, 2022. We have also agreed to commence marketing and sale efforts with respect to our Bikini.com business. In consideration for Mudrick’s agreement to enter into the First Amendment and extend the maturity date, we agreed to pay Mudrick an amendment and extension payment in the amount of 2.0% of the unpaid principal balance of the loans outstanding as of the date of the First Amendment, or approximately $0.3 million, which was added to the principal balance of the loans as of the effective date of the First Amendment.

We did not make the required repayment of the outstanding loans under the Mudrick Loan Agreements by October 31, 2022, the maturity date. This constitutes an event of default for which we have not received a waiver as of the date of this Form 10-Q. While we are actively engaged in discussions with Mudrick regarding a resolution of the event of default, we cannot provide any assurance that we will be successful in obtaining a waiver or that Mudrick will forebear from taking any enforcement actions against us.

During the nine months ended September 30, 2022, we repaid $6.2 million of principal and, as described in more detail in Note 156 ~~for information~~, we delivered all remaining shares of New Sharecare to Mudrick on ~~a subsequent principal payment on~~July 11, 2022, in partial settlement of the Mudrick ~~Loans.~~Loans, resulting in a reduction of approximately $9.7 million of principal.


Table of Contents			19			Financial Statement Index

NOTE ~~11.~~12. COMMITMENTS AND CONTINGENCIES

At ~~March 31,~~September 30, 2022, we had no material commitments outside the normal course of business.

Contingencies

As of ~~March 31,~~September 30, 2022, we were neither a defendant in any material pending legal proceeding nor are we aware of any material threatened claims against us and, therefore, we have not accrued any contingent liabilities.

Registration Rights Agreement

On September 27, 2021, we entered into a securities purchase agreement (the “Armistice Purchase Agreement”) with Armistice Capital Master Fund Ltd. (“Armistice Capital”) pursuant to which we issued shares of our common stock together with warrants to purchase our common stock, subject to certain customary anti-dilution adjustments (the “Armistice Warrants”).

In connection with our entry into the Armistice Purchase Agreement, we also entered into a registration rights agreement with Armistice Capital, pursuant to which we are obligated to file one or more registration statements, as necessary, to register under the Securities Act of 1933, as amended, the resale of the shares we issued to Armistice Capital and the shares underlying the Armistice Warrants (collectively, the “Armistice Registrable Securities”) and to obtain effectiveness of such registration statement no later than 90 days following September 27, 2021. ~~While~~The registration statement we ~~have~~ filed ~~a registration statement~~ to register the resale of the Armistice Registrable Securities was declared effective on October 31, 2022 (the “Armistice Resale Registration Statement”),. As of September 30, 2022, we had already accrued a total of $1.0 million, equal to the maximum amount of liquidated damages we are ~~currently in a comment letter process with~~required to pay under the ~~SEC staff with respect~~Armistice Registration Rights Agreement for failing to ~~such registration statement and have not been able~~satisfy our obligation to ~~achieve~~timely obtain effectiveness of the Armistice Resale Registration Statement. During the nine months ended September 30, 2022, we paid $0.2 million of this amount, resulting in an unpaid amount of $0.8 million included in other accrued expense at September 30, 2022.

Bid Price Deficiency

On February 25, 2022, we received written notice from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, for a period of 30 consecutive business days, the bid price of our common stock closed below the minimum of $1.00 per share required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had 180 calendar days, or until August 24, 2022, to regain compliance with the Bid Price Rule.

On August 30, 2022, we received a staff determination letter from Nasdaq stating that we did not regain compliance with the Bid Price Rule and we were not eligible for a second 180-day grace period because we did not comply with the minimum $5,000,000 Stockholders’ Equity initial listing requirement for the Nasdaq Capital Market. We appealed Nasdaq’s delisting determination to a Hearings Panel (the “Panel”), which heard our presentation at a hearing held on October 6, 2022.

On October 17, 2022, we received a written decision from the Panel granting our request for continued listing on Nasdaq, subject to the conditions that, on January 11, 2023, we will have demonstrated compliance with the Bid Price Rule by evidencing a closing price of $1.00 or more per share for a minimum of 10 consecutive trading sessions, and that we provide prompt notification of any significant events that occur during the period ending on January 11, 2023 that may affect our compliance with Nasdaq rules.


Table of Contents			1920			Financial Statement Index

Armistice Resale Registration Statement. As a result, we accrued $0.6 million at December 31, 2021, representing our best estimate of the liquidated damages we will be required to pay until the SEC declares the Armistice Resale Registration Statement effective or until our registration obligations in the Armistice Registration Rights Agreement terminate. The Armistice Registration Rights Agreement caps such liquidated damages at $1.0 million.

NOTE ~~12.~~13. STOCKHOLDERS' EQUITY ~~SHARE-BASED COMPENSATION AND NET LOSS PER SHARE~~(DEFICIT)

Warrants

The following table summarizes information related to our equity-classified stock warrant issuances as of and for the dates and periods noted:


		Shares	Weighted Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)			Shares	Weighted Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)

Outstanding at December 31, 2021	Outstanding at December 31, 2021	10,114,408	$	4.01	4.7	$	—	Outstanding at December 31, 2021	10,114,408	$	4.01	4.7	$	—
Granted	Granted	—	—					Granted	—	—
Exercised	Exercised	—	—					Exercised	—	—
Forfeited, cancelled or expired	Forfeited, cancelled or expired	—	—					Forfeited, cancelled or expired	—	—
Outstanding at March 31, 2022		10,114,408	$	4.01	4.4	$	—
Outstanding at September 30, 2022								Outstanding at September 30, 2022	10,114,408	$	4.01	3.9	$	—

Share-Based Compensation

On September 2, 2022, we issued 1,250,000 shares of our common stock with a fair value of $0.5 million to a vendor in exchange for services performed.

We are authorized to issue equity-based awards under our 2014 Incentive Plan, our 2017 Incentive Plan and our ~~2017~~2022 Incentive Plan, each of which our stockholders have approved. We also award cash bonuses (“China Cash Bonuses”) to our employees in China, which grants are not subject to a formal incentive plan and which can only be settled in cash. We grant such awards to attract, retain and motivate eligible officers, directors, employees and consultants. Under each of the plans, we have granted shares of restricted stock and options to purchase common stock to our officers and employees with exercise prices equal to or greater than the fair value of the underlying shares on the grant date.

Stock options and China Cash Bonuses generally expire 10 years from the grant date. All forms of equity awards and China Cash Bonuses vest upon the passage of time, the attainment of performance criteria, or both. When participants exercise stock options, we issue any shares of our common stock resulting from such exercise from new authorized and unallocated shares available at the time of exercise.


~~Table of Contents~~			20			~~Financial Statement Index~~

The following table summarizes activity under our equity incentive plans related to equity-classified stock option grants as of and for the dates and periods noted:


		Shares	Weighted Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)			Shares	Weighted Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)

Outstanding at December 31, 2021	Outstanding at December 31, 2021	14,839,020	$	3.30	6.1	$	159	Outstanding at December 31, 2021	14,839,020	$	3.30	6.1	$	159
Granted	Granted	80,614	0.77					Granted	384,732	0.49
Exercised	Exercised	—	—					Exercised	—	—
Forfeited, cancelled or expired	Forfeited, cancelled or expired	(27,500)	1.40					Forfeited, cancelled or expired	(100,000)	1.41
Outstanding at March 31, 2022		14,892,134	$	3.29	5.8	$	81
Outstanding at September 30, 2022								Outstanding at September 30, 2022	15,123,752	$	3.25	5.4	$	—

Exercisable at December 31, 2021	Exercisable at December 31, 2021	12,776,520	3.62		5.7	$	957	Exercisable at December 31, 2021	12,776,520	3.62		5.7	$	957
Exercisable at March 31, 2022		13,261,634	3.53		5.5	$	81
Exercisable at September 30, 2022								Exercisable at September 30, 2022	14,334,752	3.35		5.3	$	—


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The following table summarizes activity related to our liability-classified China Cash Bonuses as of and for the dates and periods noted:


		Shares	Weighted Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)			Shares	Weighted Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)

Outstanding at December 31, 2021	Outstanding at December 31, 2021	1,036,000	$	3.97	5.4	$	159	Outstanding at December 31, 2021	1,036,000	$	3.97	5.4	$	159

Forfeited, cancelled or expired	Forfeited, cancelled or expired	—	—					Forfeited, cancelled or expired	(299,500)	4.69
Outstanding at March 31, 2022		1,036,000	$	3.97	5.0	$	—
Outstanding at September 30, 2022								Outstanding at September 30, 2022	736,500	$	3.68	6.2	$	—

Exercisable at December 31, 2021	Exercisable at December 31, 2021	886,000	4.41		4.9	$	—	Exercisable at December 31, 2021	886,000	4.41		4.9	$	—
Exercisable at March 31, 2022		916,000	4.31		4.5	$	—
Exercisable at September 30, 2022								Exercisable at September 30, 2022	676,500	3.88		6.1	$	—

The following table presents the change in the liability associated with our China Cash Bonuses included in Accrued expense and other current liabilities (in thousands):


		Three Months Ended March 31,		Year Ended December 31,			Nine Months Ended September 30,		Year Ended December 31,
		2022		2021			2022		2021
Balance at beginning of period	Balance at beginning of period	$	439	$	679	Balance at beginning of period	$	439	$	679
Share-based compensation expense related to China Cash Bonuses	Share-based compensation expense related to China Cash Bonuses	(85)		(240)		Share-based compensation expense related to China Cash Bonuses	(340)		(240)
Balance at end of period	Balance at end of period	$	354	$	439	Balance at end of period	$	99	$	439

On July 27, 2020, the compensation committee of our board of directors approved grants to employees, directors and other service providers, excluding our CEO, of options to purchase approximately 5.4 million shares of our common stock. The option agreements governing the grants contain a stipulation that, regardless of vesting, such options do not become exercisable unless and until stockholders approve an amendment to our Amended and Restated Certificate of Incorporation to increase in the number of authorized shares of our common stock in an amount sufficient to allow for the exercise of the options and we have filed a corresponding Certificate of Amendment to our Amended and Restated Certificate of Incorporation reflecting such increase in the number of authorized shares of our common stock.


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On July 8, 2021, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock to 175,000,000, and we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware on July 9, 2021 to reflect this amendment, which became effective immediately upon filing.

As a result of the increase in the number of authorized shares of our common stock, we determined that July 8, 2021 was the grant date for accounting purposes of the stock options we originally issued on July 27, 2020. The grant date fair value of the options granted on July 27, 2020 was approximately $6.3 million. To estimate the fair value of the options with an accounting grant date of July 8, 2021, we used the Black-Scholes-Merton option pricing model with an expected volatility of 85%, a risk-free interest rate of 0.34%, and expected term of six years and no expected dividends.

Effective as of January 25, 2022, we entered into a one-year agreement with a consultant that requires us to issue to him each month an option to purchase shares of our common stock. The number of shares purchasable under each option contract to be granted is based upon certain agreed terms and assumptions, and each such option contract is intended to compensate the consultant with an aggregate fair value of $15,000. As of September 30, 2022, we had issued to the consultant options to purchase 384,732 shares of our common stock, and such options collectively represented a total share-based compensation expense of approximately $0.1 million.

The following table presents a breakdown of share-based compensation cost included in operating expense (in thousands):


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Three Months Ended March 31,
2022 2021
Stock options $ 514 $ 19
China Cash Bonuses (85) 248
Total $ 429 $ 267


	Nine Months Ended September 30,
	2022		2021
Stock options	$	1,525	$	3,823
China Cash Bonuses	(340)		(326)
Total	$	1,185	$	3,497

We record share-based compensation expense in the books of the subsidiary that incurs the expense, while for equity-classified stock options we record the change in additional paid-in capital on the corporate entity because the corporate entity’s equity underlies such stock options.

The following table presents information regarding unrecognized share-based compensation cost associated with stock options and China Cash Bonuses:


			~~March 31,~~September 30, 2022
Unrecognized share-based compensation cost for non-vested awards (in thousands):
Stock options			~~1,564~~597
China Cash Bonuses			637
Weighted-average years over which unrecognized share-based compensation expense will be recognized:
Stock options			~~0.8~~0.3
China Cash Bonuses			~~0.8~~0.3

NOTE 14. RELATED PARTY TRANSACTIONS

As of September 30, 2022, we owed approximately $0.9 million to members of management representing various operating expense payments made on our behalf. Approximately $0.5 million was repaid in October 2022.

NOTE ~~13.~~15. CHINA BUSINESS PARTNER

We ~~and the VIEs~~ interact with an unrelated entity (the “China Business Partner”) in more than one capacity. Firstly, since 2020, ~~one of the VIEs has~~we have been working with the China Business Partner to earn revenue by obtaining business from some of the largest companies in China. Secondly, our artificial intelligence business in the U.S. has, to date, purchased substantially all of its inventory from a subsidiary of the China Business Partner which manufactures certain equipment to our specifications; though, during the ~~quarter~~six months ended ~~March 31,~~September 30, 2022, we did not make a material amount of such purchases. In addition, a member of our senior leadership team maintains a role in the senior management structure of the China Business Partner.

~~During the prior years, one~~As of December 31, 2021, $4.0 million remained outstanding of the ~~VIEs~~amount we advanced ~~an aggregate of approximately $4.0 million~~ to the China Business Partner pursuant to an agreement between the two entities. Under the executed agreement, ~~the VIE~~we had an obligation to advance as much as an aggregate amount of $5.1 million over the loan term of five years, and ~~the VIE~~we could elect to convert amounts due to it under the agreement into equity of the China Business Partner upon any equity financing the China Business Partner undertook during the term of the agreement. The business purpose for the advances was to allow the China Business Partner to purchase and modify hardware to integrate with our software and market such integrated product to potential customers, including some of the largest companies in China. During the ~~period~~three months ended March 31, 2022, the China Business Partner repaid the advances in full.


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During the three and nine months ended ~~March 31,~~September 30, 2022, ~~the VIEs~~we recognized approximately ~~$2.2~~$1.9 million and $5.3 million, respectively, of revenue from the relationship with the China Business ~~Partner, which amount was recorded in~~Partner. At September 30, 2022, we had $3.0 million of accounts ~~receivable.~~receivable from the China Business partner.


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~~NOTE 14. CONSOLIDATING FINANCIAL SCHEDULES~~

~~Please see~~ ~~Note 1~~ ~~for information regarding our corporate structure and our relationship to the VIEs.~~

Consolidating Balance Sheets (Unaudited)
March 31, 2022
($ in thousands)
Corporate & Non-VIE Entities VIEs Eliminating Entries Consolidated Total
Assets
Cash $ 2,604 $ 87 $ — $ 2,691
Trade accounts receivable, net 4 11,289 — 11,293
Inventory, net 1,433 59 — 1,492
Investment in marketable securities 21,444 — — 21,444
Prepaid expense and other current assets 3,520 4,753 — 8,273
Total current assets 29,005 16,188 — 45,193
Property and equipment, net 1,272 2 — 1,274
Operating lease assets 92 154 — 246
Investment in VIEs 9,011 — (9,011) —
Other long-term assets 375 28 — 403
Total assets $ 39,755 $ 16,372 $ (9,011) $ 47,116
Liabilities
Accounts payable $ 4,244 $ 5,855 $ — $ 10,099
Accrued expense and other current liabilities 2,612 2,589 — 5,201
Contract liability 306 126 — 432
Notes payable, net of unamortized discount and debt issuance cost 25,208 — — 25,208
Total current liabilities 32,370 8,570 — 40,940
Operating lease liabilities, long-term — 55 — 55
Total liabilities 32,370 8,625 — 40,995
Stockholders’ Equity
Preferred stock — — — —
Common stock 105 163 (163) 105
Additional paid-in-capital 364,753 30,368 (30,368) 364,753
Accumulated other comprehensive income 996 (1,289) 25 (268)
Accumulated deficit (358,469) (21,495) 21,495 (358,469)
Total stockholders’ equity 7,385 7,747 (9,011) 6,121
Total liabilities and stockholders’ equity $ 39,755 $ 16,372 $ (9,011) $ 47,116


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Consolidating Statement of Operations (Unaudited)
Three Months Ended March 31, 2022
($ in thousands)
Corporate & Non-VIE Entities VIEs Eliminating Entries Consolidated Total
Revenue $ 181 $ 4,653 $ (167) $ 4,667
Cost and expense
Cost of revenue (excluding depreciation and amortization) 44 4,226 — 4,270
Sales and marketing 53 95 — 148
Technology and development (19) 474 — 455
General and administrative 4,012 94 (167) 3,939
Depreciation and amortization 41 — — 41
Total cost and expense 4,131 4,889 (167) 8,853
Operating loss (3,950) (236) — (4,186)
Other income (expense)
Interest expense (2,186) — — (2,186)
Loss on investment (19,056) — — (19,056)
Other gain (loss), net (8) 7 — (1)
Share in income (loss) of VIEs (229) — 229 —
Total other income, net (21,479) 7 229 (21,243)
Net income (loss) $ (25,429) $ (229) $ 229 $ (25,429)


~~Table of Contents~~			25			~~Financial Statement Index~~

Consolidating Statement of Cash Flows (Unaudited)
Three Months Ended March 31, 2022
($ in thousands)
Corporate & Non-VIE Entities VIEs Eliminating Entries Consolidated Total
Cash flows from operating activities:
Net loss $ (25,429) $ (229) $ 229 $ (25,429)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and impairments 41 — — 41
Share-based compensation 429 — — 429
Amortization of debt issuance costs and discount 1,095 — — 1,095
Gain on investment revaluation 19,056 — — 19,056
Share in net loss (income) of VIEs 229 — (229) —
Other 41 2 — 43
Changes in operating assets and liabilities:
Accounts receivable 29 (1,081) — (1,052)
Inventory (145) (1) — (146)
Prepaid expenses and other assets (1,641) (254) — (1,895)
Operating lease assets 21 (73) — (52)
Accounts payable, accrued expense and other liabilities (76) (590) — (666)
Contract liability (104) (38) — (142)
Operating lease liabilities (25) 55 — 30
Net cash used in operating activities $ (6,479) $ (2,209) $ — $ (8,688)
Cash flows from investing activities:
Proceeds from investment 1,849 — — 1,849
Purchases of property, equipment and software (8) (2) — (10)
Payment of amounts capitalized to software in progress (949) — — (949)
Other cash outflows from VIEs, net (2,058) — 2,058 —
Net cash provided by (used in) investing activities (1,166) (2) 2,058 890
Cash flows from financing activities:
Repayments of debt (3,698) — — (3,698)
Other cash inflows from non-VIEs, net — 2,058 (2,058) —
Net cash provided by financing activities (3,698) 2,058 (2,058) (3,698)
Net change in cash (11,343) (153) — (11,496)
Cash:
Beginning of period 13,947 240 — 14,187
End of period $ 2,604 $ 87 $ — $ 2,691


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NOTE ~~15.~~16. SUBSEQUENT EVENTS

Ionic Transactions

On ~~April 4,~~October 6, 2022, we ~~repaid $2.5 million~~entered into a debenture purchase agreement (the “Debenture Purchase Agreement”) with Ionic Ventures, LLC (“Ionic”), pursuant to which we issued a convertible subordinated debenture in the original principal amount of ~~principal~~$2,778,000 (the “Debenture”) to Ionic for a purchase price of $2,500,000. The Debenture accrues interest at a rate of 8% per annum. The interest rate on the ~~Mudrick Loans.~~Debenture increases to a rate of 15% per annum if the Debenture is not fully paid or converted by February 6, 2023 (the “Trigger Date”) or upon the occurrence of certain trigger events, including, without limitation, the suspension from trading or the delisting of our common stock from Nasdaq and the occurrence of any material adverse effect. In addition, if the Debenture is not fully paid or converted by the Trigger Date, the original principal amount of the Debenture will be deemed to have been $3,334,000 from the issuance date. The Debenture matures on June 6, 2023.

The Debenture automatically converts into shares of common stock at the earlier of (i) the effective date of a registration statement registering the resale of the shares which may be issued upon conversion of the Debenture and pursuant to the ELOC Purchase Agreement (as defined below) (the “Ionic Resale Registration Statement”) and (ii) 181 days after the issuance date of the Debenture.

The number of shares of common stock issuable upon conversion of the Debenture shall be determined by dividing the outstanding balance under the Debenture (including all accrued and unpaid interest and accrued and unpaid late charges, if any) by a conversion price that is the lower of (x) 80% (or 70% if our common stock is not then trading on Nasdaq) of the average of the 10 lowest volume-weighted average prices (“VWAPs”) over a specified measurement period following the conversion date, and (y) $0.50 (the “Fixed Conversion Price”), subject to full ratchet anti-dilution protection in the event we issue certain equity securities at a price below the then Fixed Conversion Price.

On November 7, 2022, we entered into an amendment to the Debenture Purchase Agreement with Ionic, pursuant to which we and Ionic agreed to amend and restate the Debenture to provide that (i) in no event will the conversion price under the Debenture be below a floor price of $0.10 (such price, as may be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction, the “Floor Price”), and (ii) in the event the actual conversion price is less than the Floor Price, (A) Ionic will be entitled to that number of Settlement Conversion Shares issuable with an assumed conversion price equal to the Floor Price, and (B) we will be required to make a cash payment to Ionic on or prior to the Maturity Date of an amount that is calculated by subtracting the number of shares of common stock issuable at an assumed conversion price equal to the Floor Price from the number of shares of common stock issuable at the actual conversion price, multiplied by a price equal to the average of the 10 lowest VWAPs during the specified measurement period.

Additionally, in the event of a bankruptcy, we are required to redeem the Debenture in cash in an amount equal to the then outstanding balance of the Debenture multiplied by 120%, subject, however, to the provisions of a subordination and intercreditor agreement between Ionic and Mudrick. The Debenture further provides that we will not effect the conversion of any portion of the Debenture, and the holder thereof will not have the right to a conversion of any portion of the Debenture, to the extent that after giving effect to such conversion, the holder together with its affiliates would beneficially own more than 4.99% of the outstanding shares of our common stock immediately after giving effect to such conversion (the “Beneficial Ownership Limitation”).

Also, on October 6, 2022, we entered into a purchase agreement (the “ELOC Purchase Agreement”) with Ionic, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Ionic to purchase up to an aggregate of $50,000,000 of shares of our common stock over the 36-month term of the ELOC Purchase Agreement. Under the ELOC Purchase Agreement, after the satisfaction of certain commencement conditions, including, without limitation, the effectiveness of the Ionic Resale Registration Statement, and (ii) pursuant to the ELOC Purchase Agreement (collectively, the “Ionic Resale Registration Statement”) and that the Debenture shall have been fully converted into shares of common stock or shall otherwise have been fully redeemed and settled in all respects in accordance with the terms of the Debenture, we have the right to present Ionic with a purchase notice (each, a “Purchase Notice”) directing Ionic to purchase any amount up to $3,000,000 of our common stock per trading day, at a per share price (the “Purchase Price”) equal to 90% (or 80% if our common stock is not then trading on Nasdaq) of the average of the 5 lowest VWAPs over a specified measurement period. With each purchase under the ELOC Purchase Agreement, we are required to deliver to Ionic an additional number of shares equal to 2.5% of the number of shares of common stock deliverable upon such purchase.


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In addition, Ionic will not be required to buy any shares of our common stock pursuant to a Purchase Notice on any trading day on which the closing trade price of our common stock is below $0.25. We will control the timing and amount of sales of our common stock to Ionic. Ionic has no right to require any sales by us, and is obligated to make purchases from us as directed solely by us in accordance with the ELOC Purchase Agreement. The ELOC Purchase Agreement provides that we will not be required or permitted to issue, and Ionic will not be required to purchase, any shares under the ELOC Purchase Agreement if such issuance would violate Nasdaq rules, and we may, in our sole discretion, determine whether to obtain stockholder approval to issue shares in excess of 19.99% of our outstanding shares of common stock if such issuance would require stockholder approval under Nasdaq rules. Ionic has agreed that neither it nor any of its agents, representatives and affiliates will engage in any direct or indirect short-selling or hedging our common stock during any time prior to the termination of the ELOC Purchase Agreement.

The ELOC Purchase Agreement may be terminated by us if certain conditions to commence have not been satisfied by December 31, 2022. The ELOC Purchase Agreement may also be terminated by us at any time after commencement, at our discretion; provided, however, that if we sold less than $25,000,000 to Ionic (other than as a result of our inability to sell shares to Ionic as a result of the Beneficial Ownership Limitation, our failure to have sufficient shares authorized or our failure to obtain stockholder approval to issue more than 19.99% of our outstanding shares), we will pay to Ionic a termination fee of $500,000, which is payable, at our option, in cash or in shares of common stock at a price equal to the closing price on the day immediately preceding the date of receipt of the termination notice. Further, the ELOC Purchase Agreement will automatically terminate on the date that we sell, and Ionic purchases, the full $50,000,000 amount under the agreement or, if the full amount has not been purchased, on the expiration of the 36-month term of the ELOC Purchase Agreement.

Concurrently with entering into the Debenture Purchase Agreement and the ELOC Purchase Agreement, we also entered into a registration rights agreement with Ionic (the “Registration Rights Agreement”), in which we agreed to file with the SEC one or more registration statements, as necessary, and to the extent permissible and subject to certain exceptions, to register under the Securities Act of 1933, as amended, the resale of the shares of our common stock issuable upon conversion of the Debenture, the shares of common stock that may be issued to Ionic under the ELOC Purchase Agreement and the shares of common stock that may be issued to Ionic if we fail to comply with our obligations in the Registration Rights Agreement. The Registration Rights Agreement requires that we file, within 30 days after signing, the Ionic Resale Registration Statement and use commercially reasonable efforts to have the Ionic Resale Registration Statement declared effective by the SEC on or before the earlier of (i) 90 days after signing (or 120 if such registration statement is subject to full review by the SEC) and (ii) the 2nd business day after we are notified we will not be subject to further SEC review. If we fail to file or have the Ionic Resale Registration Statement declared effective by the specified deadlines, then in each instance, we will issue to Ionic 150,000 shares of our common stock within 2 trading days after such failure, and with respect to the Conversion Shares, we will additionally pay in cash, as liquidated damages, an amount equal to 2% of the amount then currently outstanding under the Debenture for failure to file and have the Ionic Resale Registration Statement declared effective by the same deadlines set forth above for each 30-day period after each such failure. We filed the Ionic Resale Registration Statement on November 7, 2022.

Nasdaq Hearing

On October 17, 2022, we received a written decision from the Nasdaq Hearings Panel granting our request for continued listing on Nasdaq, subject to the conditions that, on January 11, 2023, we will have demonstrated compliance with the Bid Price Rule by evidencing a closing price of $1.00 or more per share for a minimum of 10 consecutive trading sessions, and that we provide prompt notification of any significant events that occur during the period ending on January 11, 2023 that may affect our compliance with Nasdaq rules.

Mudrick Loans

On October 6, 2022, we entered into a Provisional Waiver and Consent Agreement (the “Mudrick Waiver”) to the Mudrick Loan Agreements. Pursuant to the Mudrick Waiver, Mudrick agreed, among other things, to (i) waive certain then-existing events of default under the Mudrick Loan Agreements, (ii) defer payment of interest for the months of July, August and September 2022 to October 6, 2022, the closing date of the Debenture Purchase Agreement, and (iii) consent to the issuance of the Debenture and the other transactions contemplated by the Debenture Purchase Agreement. In connection with the Mudrick Waiver, we became a party to a Subordination and Intercreditor Agreement with Mudrick and Ionic, pursuant to which Ionic agreed, among other things, that all of our obligations to Ionic under the Debenture will be fully and unconditionally junior and subordinate in right of cash payment to the prior satisfaction in full of our obligation to Mudrick.


Table of Contents			25			Financial Statement Index


Table of Contents			26			Financial Statement Index

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,~~September 30, 2022 in conjunction with our 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 Business, Risk Factors and Special Note Regarding Forward-Looking Statements in this Form 10-Q.

OVERVIEW

We ~~and the VIEs that we consolidate constitute~~are a diversified global technology business with leading AI and data-analytics, as well as a portfolio of digital media properties.

OUR BUSINESS

Corporate Structure

We are a holding company incorporated in Delaware and not a Chinese operating company. As a holding company, we conduct most of our operations through our subsidiaries, each of which is wholly owned. We have historically conducted a significant part of our operations through ~~our subsidiaries and through~~ contractual arrangements ~~with the~~between our WFOE and certain VIEs based in ~~China.We use the VIE structure~~China to address challenges resulting from laws, policies and practices that may disfavor foreign-owned entities that operate within industries deemed sensitive by the Chinese government. We ~~own 100% of the equity of a WFOE, which has entered into contractual arrangements with the VIEs, which are owned by members of our management team in China and/or by third parties.~~

~~The agreements governing~~We terminated all of the ~~VIE~~ contractual arrangements have not been tested in a court of law. However, an article published in China Business Law Journal indicated that a China International Economic and Trade Arbitration Commission Shanghai tribunal ruled in 2010 and 2011 in two related cases involvingbetween the contractual arrangement of an online game operating company that the contractual arrangement was void on the grounds that such arrangement violated the mandatory administrative regulations prohibiting foreign investors from investing in the online game operation business and constituted “concealing illegal intentions with a lawful form.” According to publicly available information, while the agreements entered into by the parties in the aforementioned CIETAC cases are typical VIE agreements, the PRC domestic company involved in such cases was mainly engaged in online game operation. Although the PRC foreign investment regime restricts or prohibits foreign investment in certain industries, online game operation is one of few industries where there are rules specifically prohibiting foreign investors from controlling and participating in the business indirectly through contractual or technical support arrangements. Though the agreements in the CIETAC cases are similar to our contractual arrangements with the VIEs, weWFOE and the VIEs ~~do not operate in~~and exercised our rights under the ~~online game operation industry~~exclusive call option agreements between the WFOE and ~~to our knowledge, the business conducted by~~ the VIEs ~~is not prohibited from investment from foreign investors in China. We also note~~such that, effective as of September 19, 2022, we obtained 100% of the ~~rulings in~~equity ownership of the ~~CIETAC cases are not binding on Chinese courts or other arbitration tribunals.~~entities we formerly consolidated as VIEs and which we now consolidate as wholly-owned subsidiaries.


Table of Contents			2827			Financial Statement Index

~~(Shanghai) Co., Ltd., our WFOE, on the other hand, as illustrated in the following diagram are governed by contractual arrangements and do not constitute equity ownership.~~


~~Table of Contents~~			29			~~Financial Statement Index~~

~~result in a material change in our operations and may cause the value of our common stock to depreciate significantly or become worthless.~~

~~Risks of Doing Business in China~~


Table of Contents			28			Financial Statement Index

significantly decline or become worthless. ~~Recently,~~In recent years, the Chinese government adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to the use of variable interest entities, cybersecurity, data security, export control and anti-monopoly concerns. As of the date of this Form 10-Q, ~~neither~~ we ~~nor the VIEs~~ have neither been involved in any investigations on cybersecurity review initiated by any Chinese regulatory authority, nor ~~has any of them~~ received any inquiry, notice or sanction. As of the date of this Form 10-Q, no relevant laws or regulations in China explicitly require us to seek approval from the CSRC for any securities listing. As of the date of this Form 10-Q, ~~neither~~ we ~~nor the VIEs~~ have not received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other Chinese governmental authorities relating to securities listings. However, since these statements and regulatory actions are newly published, official guidance and related implementation rules have not all been issued. It is highly uncertain what potential impact such modified or new laws and regulations will have on our ability to conduct our business, accept investments or list or maintain a listing on a U.S. or foreign exchange.

As of the date of this Form 10-Q, we ~~and the VIEs~~ are not required to seek permissions from the CSRC, the CAC or any other entity that is required to approve ~~of the~~our operations ~~of the VIEs.~~in China. Nevertheless, Chinese regulatory authorities may in the future promulgate laws, regulations or implement rules that require us or our subsidiaries ~~or the VIEs~~ to obtain permissions from such regulatory authorities to approve ~~the~~our operations ~~of the VIEs~~ or any securities listing.

Holding Foreign Companies Accountable Act

The HFCA Act was enacted on December 18, 2020. The HFCA Act states if the SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market in the United States. On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two. On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction. On December 16, 2021, the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in China and in Hong Kong because of positions taken by Chinese and Hong Kong authorities in those jurisdictions. The PCAOB has made such determination as mandated under the HFCA Act. Pursuant to each annual determination by the PCAOB, the SEC will, on an annual basis, identify issuers that have used non-inspected audit firms and thus are at risk of such suspensions in the future.

On August 26, 2022, the CSRC, the Ministry of Finance of the PRC, and the PCAOB signed the Protocol, taking the first step toward opening access for the PCAOB to completely inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. Pursuant to the Protocol, the PCAOB shall have independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the SEC. However, uncertainties still exist as to compliance with the Protocol. Depending on the implementation of the Protocol, if the PCAOB continues to be prohibited from conducting complete inspections and investigations of PCAOB-registered public accounting firms in China, then China-based companies will be delisted pursuant to the HFCA Act despite the Protocol. Therefore, there is no assurance that the Protocol could give relief to China-based companies against the delisting risk from the application of the HFCA Act.


Table of Contents			29			Financial Statement Index

Transfer of Cash or Assets

Dividend Distributions

As of the date of this Form 10-Q, none of our subsidiaries ~~or any of the consolidated VIEs~~ have made any dividends or distributions to ~~us.~~Remark.


~~Table of Contents~~			30			~~Financial Statement Index~~

from our ~~WFOE~~subsidiaries for cash requirements, including the funds necessary to pay dividends and other cash contributions to our stockholders.

The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. If we are unable to receive all of the revenues from our operations through ~~the current VIE contractual arrangements,~~our China-based subsidiaries, we may be unable to pay dividends on our common stock.

~~Our Company’s Ability to Settle Amounts Owed under the VIE Contractual Arrangements~~

~~First, any payments from the VIEs to our WFOE are subject to Chinese taxes, including a 6% VAT and 25% enterprise income tax.~~

AI Business

Through the proprietary data and AI software platform we ~~co-developed with one of the VIEs,~~developed, our Remark AI business in the U.S. and the KanKan AI business ~~operated by the VIEs~~ in the Asia-Pacific region generate revenue by delivering AI-based computer vision products, computing devices and software-as-a-service solutions for businesses in many industries. In addition to the other work that we ~~and the VIEs~~ have ramped up, we ~~and the VIEs~~ 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. Our research team continues to participate in various computer vision competitions at which it wins or ranks near or at the top.


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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. We have also begun to expand our AI-based safety solutions to railway customers in the transportation market.

Retail Solutions. Utilizing a client’s existing cameras and IoT devices 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


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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 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.

Railway Safety Solutions. In railway settings, our product known as the Smart Sentry uses the ~~SSP (safety and security platform) software,~~Smart Safety Platform (the “SSP”), a specialized version of the software platform we developed, ~~with one of the VIEs,~~ to provide intrusion-detection capabilities that allow customers to monitor railroad tracks, rail yards and other sensitive areas around the clock, in all weather conditions and at varying distances. The Smart Sentry, which customers can deploy as an individual unit or as a system of units, detects when pedestrians or vehicles are crossing a railway or entering the railway tracks as a train is approaching, and then alerts customer personnel to the situation so action can be taken to prevent hazardous incidents from happening. When deployed in multiple-unit systems, each Smart Sentry unit works in concert with the other units to relay warnings that give train operators sufficient time to respond to the track intrusions from miles away. Using the Smart Sentry’s high-end cameras and other hardware, the SSP also gathers and analyzes data on railway traffic and weather conditions along various railways to provide valuable, actionable information to railway personnel. In the near future, we expect to add more safety features to Smart Sentry, such as the ability to detect worn or otherwise damaged track and the ability to identify stationary obstacles like fallen rocks or trees.

Biosafety Solutions. ~~With help from one of the VIEs, we~~We repurposed and improved our existing urban life cycle solution that we were selling to make schools in China “smart” schools to build a product line of high-quality, highly-effective thermal imaging solutions that leverage our innovative software.

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 necessary, such as at a customer’s office entrances where employees can be scanned as they enter for indications of an elevated


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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.

Other Businesses

Though our focus remains on our AI and data analytics solutions, which produce substantially all of our revenue, we ~~are also pursuing a refresh of our~~will continue to operate the Bikini.com e-commerce business until such time as ~~well as~~we can sell such business in the ~~development of~~near future. We also have continued developing a metaverse that we believe ~~will dovetail not only with the Bikini.com business, but also with~~can lead to opportunities in other verticals to which we can apply our AI expertise and develop new revenue streams for our investors.

In addition to operating businesses, we maintain ownership of roughly 2.5 percent of the common stock of Sharecare, an established health and wellness platform with more than 100 million users. We continue to evaluate opportunities to monetize and maximize the value of this asset for our shareholders.


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Overall Business Outlook

The innovative AI and data analytics solutions we ~~and the VIEs~~ already sell will continue to serve as the backbone of our efforts to expand our business not only in the Asia-Pacific region, where we believe there still are fast-growth AI market opportunities for our solutions, but also in the United States and Europe, where we see a tremendous number of requests for AI products and solutions in the workplace and public safety markets. We 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.

The response to the COVID-19 pandemic will likely continue to adversely affect our business and financial results, as could economic and geopolitical conditions in some international regions, and we do not yet know what will be the ultimate effects on our business. The COVID-19 pandemic caused a broad shift towards remote working arrangements for many businesses worldwide and injected uncertainty and delay into decision-making processes for such businesses. Varying degrees of preventative measures are still in place in China and other parts of the world, including city-wide lockdowns, travel restrictions, closures of non-essential businesses and other quarantine measures. In particular, the preventative measures in China as a result of the Chinese government’s “Zero-COVID” policy have significantly limited the operational capabilities of ~~the VIEs.~~our China-based subsidiaries. Many cities across large swaths of China have recently been fully or partially locked down for weeks or even months, including economically significant regions such as Shanghai. Such lockdowns have had a material adverse impact on our business and we expect them to continue to have a material adverse impact on our business at least through the ~~second~~third quarter of 2022.

Inflation and Supply Chain

Other than the impact of inflation on the general economy, we do not believe that inflation has had a material effect on our operations to date. However, there is a risk that our operating costs could be subject to inflationary pressures in the future, which would have the effect of increasing our operating costs and put additional stress on our working capital resources.

We have not experienced any supply chain disruptions that have had a material effect on our operations to date. As our business begins to expand in the U.S. based initially on our SSP software, we could be subjected to the risk of supply chain disruptions with regard to high-technology products such as servers and related equipment that we use to train our AI software algorithms and which we plan to sell to customers to support operation of the SSP.

Business Developments During 2022

~~Despite the~~The COVID-19 pandemic ~~causing~~caused renewed lockdowns in China, which made it difficult for us to interact with our clients and ~~vendors during the first quarter of 2022,~~vendors. While we were able to complete several larger projects during the first half of 2022, primarily during the first quarter, including construction projects obtained through our China Business Partner and projects related to school ~~campuses.~~campuses, ongoing lockdowns throughout the second and third quarters prevented us from being able to complete as many projects as we otherwise had planned to complete this year.


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The following table presents our revenue categories as a percentage of total consolidated revenue during the ~~years~~three and nine months ended ~~March 31,~~September 30, 2022 and 2021.


		Three Months Ended March 31,			Three Months Ended September 30,						Nine Months Ended September 30,
			2022			2021			2022		2021		2022		2021
AI-based products and services	AI-based products and services		97	%		92	%	AI-based products and services	95	%	68	%	97	%	90	%
Advertising and other	Advertising and other		3	%		8	%	Advertising and other	5	%	32	%	3	%	10	%


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CRITICAL ACCOUNTING POLICIES

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, we made no material changes to our critical accounting policies as we disclosed them in Part II, Item 7 of our 2021 Form 10-K.

RESULTS OF OPERATIONS

The following tables summarize our operating results for the three and nine months ended ~~March 31,~~September 30, 2022, and the discussion following the table explains material changes in such operating results compared to the three and nine months ended ~~March 31,~~September 30, 2021.


(dollars in thousands)	Three Months Ended September 30, 2022				Change
	2022		2021		Dollars		Percentage
Revenue, including amounts from China Business Partner	$	2,812	$	1,234	$	1,578	128	%

Cost of revenue	2,459		854		1,605		188	%
Sales and marketing	270		882		(612)		(69)	%

Technology and development	41		635		(594)		(94)	%
General and administrative	6,726		5,493		1,233		22	%
Depreciation and amortization	43		35		8		23	%



Interest expense	(1,365)		(438)		(927)		212	%

Change in fair value of warrant liability	—		411		(411)		(100)	%
Gain on investment	(348)		78,917		(79,265)		(100)	%

Gain on debt extinguishment	—		425		(425)		(100)	%

Other gain (loss), net	(493)		96		(589)		(614)	%
Provision for income taxes	9		—		9
Net loss	(8,924)		72,746		(81,670)		(112)	%

(dollars in thousands) Three Months Ended March 31, Change
2022 2021 Dollars Percentage
Revenue, including $2.2 million from China Business Partner $ 4,667 $ 4,406 $ 261 6 %
Cost of revenue 4,270 2,752 1,518 55 %
Sales and marketing 148 1,001 (853) (85) %
Technology and development 455 1,550 (1,095) (71) %
General and administrative 3,939 2,697 1,242 46 %
Depreciation and amortization 41 66 (25) (38) %
Interest expense (2,186) (235) (1,951) 830 %
Other income — — —
Change in fair value of warrant liability — (1,610) 1,610 (100) %
Loss on investment (19,056) — (19,056)
Other gain (loss) (1) 44 (45) (102) %

~~Revenue and Cost of Revenue.~~ During the three months ended March 31, 2022, the VIEs continued to complete more AI-related projects than in the same period of the prior year, including projects associated with the VIEs’ collaboration with an unrelated entity (the “China Business Partner”), resulting in $0.8 million more revenue. Decreases in U.S. revenue of approximately $0.2 million from our biosafety business and of approximately $0.3 million of advertising revenue partially offset the increased revenue from China.

~~The increase in cost of revenue during the three months ended March 31, 2022 was related to the VIEs’ completion of more new projects as described above.~~

~~Sales and marketing.~~ The decrease in sales and marketing expense during the three months ended March 31, 2022 resulted because the three months ended March 31, 2021 included $0.6 million that one of our VIEs advanced to our China Business partner, and such amount was classified as marketing expense (see ~~Note 13~~ ~~in the Notes to Unaudited Condensed Consolidated Financial Statements).~~

~~Technology and development.~~ Consulting fees decreased $0.6 million during the three months ended March 31, 2022, because we no longer needed certain third-party services after our acquisition, in an immaterial business combination, of our United Kingdom subsidiary. Additionally, the three months ended March 31, 2022 reflected a small decrease in our common


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~~stock price while~~


(dollars in thousands)	Nine Months Ended September 30,				Change
	2022		2021		Dollars		Percentage
Revenue, including amounts from China Business Partner	$	10,037	$	9,656	$	381	4	%

Cost of revenue	8,576		5,858		2,718		46	%
Sales and marketing	606		2,281		(1,675)		(73)	%

Technology and development	1,004		3,490		(2,486)		(71)	%
General and administrative	14,598		10,672		3,926		37	%
Depreciation and amortization	121		150		(29)		(19)	%



Interest expense	(5,325)		(1,053)		(4,272)		406	%

Change in fair value of warrant liability	—		123		(123)		(100)	%
Gain (loss) on investment	(26,356)		78,917		(105,273)		(133)	%

Gain on debt extinguishment	—		425		(425)		(100)	%

Other gain (loss), net	(342)		116		(458)		(395)	%
Provision for income taxes	9		(9)		18		(200)	%
Net loss	(46,882)		65,724		(112,606)		(171)	%

Revenue and Cost of Revenue. During the ~~same period~~three and nine months ended September 30, 2022, we completed larger AI-related projects than in the comparable periods of the prior year, ~~had a moderate~~including projects associated with our collaboration with an unrelated entity (the “China Business Partner”), resulting in $1.9 million and $3.7 million more revenue, respectively. Decreases in U.S. revenue during the three months ended September 30, 2022 of $0.2 million from advertising related to the daily fantasy sports project and approximately $0.1 million from our e-commerce business partially offset the increase in revenue from China. Decreases in U.S. revenue during the nine months ended September 30, 2022 of approximately $2.8 million from AI data intelligence services and advertising related to a daily fantasy sports project that was not repeated in the current year and $0.4 million from our ~~common stock price,~~biosafety business due to a ~~situation that caused a $0.3 million~~decline in demand, partially offset the increased revenue from China.

The increase in cost of revenue during the three and nine months ended September 30, 2022 was related to our completion of larger projects in China as described above, partially offset by the decrease in cost of revenue associated with the U.S. revenue decreases described above.

Sales and marketing. The decrease in sales and marketing expense during the three and nine months ended September 30, 2022 resulted because the prior year to date included $0.6 million and $1.9 million, respectively, that we advanced to our China Business partner, and such amount was classified as marketing expense. During the nine months ended September 30, 2022, the $1.9 million was partially offset by approximately $0.6 million resulting from our completion of orders from a client that resulted from our joint efforts with our China Business Partner. Because we had provided money to our China Business Partner in 2021 for the business development efforts that resulted in the customer orders, we had recorded the $0.6 million as an offset to the expense. Changes in other expense categories, including shares-based compensation expense and payroll and benefits expense, contributed to the overall change in sales and marketing expense but were individually immaterial and not representative of material trends.

Technology and development. During the three months ended September 30, 2022, we reclassified a refundable tax credit we received from the government of the United Kingdom resulting from our research and development activities in its jurisdiction from Other gain to technology and development expense. Consulting fees decreased $1.3 million during the nine months ended September 30, 2022, because we no longer needed certain third-party services after our acquisition, in an immaterial business combination, of our U.K. subsidiary. Additionally, the tax credit from the United Kingdom reduced the expense and share-based compensation expense ~~related to our outstanding liability-classified China Cash Bonuses. Stock price is an input to~~decreased $0.4 million during the ~~model we use to estimate the fair value of the China Cash Bonuses, and changes in stock price can cause large fluctuations in our estimates of fair value~~same period.


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General and administrative. ~~The increase in general and administrative expense during~~During the three and nine months ended ~~March 31,~~September 30, 2022, ~~was primarily the~~as a result of the ongoing lockdowns related to China’s Zero-COVID policy, we have had to re-evaluate the amounts receivable from customers based on recent information and, as a ~~$0.5~~result, we increased our reserve for doubtful accounts by $2.3 million. Additionally, we experienced an increase of $0.8 million ~~increase~~ in ~~share-based compensation resulting almost entirely from~~legal and other professional fees primarily in connection with financings that were completed after the ~~recognition~~end of the ~~stock option issuances made~~quarter and the filing of amendments to registration statements, and increases of $0.7 million and $1.7 million, respectively, in ~~July 2020 for which an accounting grant date did not occur until July 2021. Also contributing to the increase was a $0.3 million increase in payroll and benefits, and a $0.2 million increase~~ certain business development expenses as we work to expand our client base. The increases were partially offset by a decrease of $2.8 million and $1.8 million, respectively, in share-based compensation expense. Also during the nine months ended September 30, 2022, our payroll and benefits increased $0.7 million.

Interest expense. We executed ~~a $30.0 million note payable~~the Original Mudrick Loan Agreements in December 2021, pursuant to which ~~bears~~we obtained the Mudrick Loans in the aggregate principal amount of $30.0 million. The Mudrick Loans bore interest at 16.5%~~; such note payable was~~ through July 2022 and, following an amendment, now bear interest at 18.5%. The Mudrick Loans were the primary cause of the increase in interest expense during the three and nine months ended ~~March 31,~~September 30, 2022. The same period of the prior year included significantly less debt principal outstanding, with such principal bearing lower interest rates than on the ~~note payable we executed in December 2021.~~Mudrick Loans. Included as part of interest expense during the nine months ended September 30, 2022 was $2.2 million of amortization of debt discount and debt issuance cost related to the Mudrick Loans, as well as a $0.3 million amendment and extension fee related to the First Amendment to the Mudrick Loan Agreements.

~~Loss~~Gain (loss) on ~~investment in marketable securities.~~investment. On July 1, 2021, as the result of a business combination involving Legacy Sharecare and New Sharecare, our equity in Legacy Sharecare converted into cash and shares of publicly traded common stock of New ~~Sharecare (see~~ ~~Note 5~~ ~~in the Notes to Unaudited Condensed Consolidated Financial Statements).~~Sharecare. As a result of the common stock of New Sharecare being traded on a national securities exchange, we were able to remeasure our investment at fair value. Since July 1, 2021, the value ~~resulting in~~of the New Sharecare stock has declined significantly, which caused the decrease from a large gain on investment during the three and nine months ended September 30, 2021, to the small gain during the three months ended September 30, 2022 and the loss of ~~$19.1~~$26.4 million during the nine months ended September 30, 2022.

Gain on debt extinguishment. During the third quarter of 2021, we received notification that our previously-outstanding Paycheck Protection Program loan had been forgiven, resulting in a gain of approximately $0.4 million.

Change in fair value of warrant liability. After reclassifying our warrants to equity on August 31, 2021, we are no longer required to routinely remeasure them at fair ~~value, while~~value.

Other gain (loss). Other loss during the ~~three~~nine months ~~ending March 31, 2021 included such a remeasurement.~~ended September 30, 2022 increased over the other gain we recorded during the same period of the prior year because we accrued $0.4 million of liquidated damages during the second quarter of 2022 related to the Armistice Resale Registration Statement which became effective after the time frame during which we were required to ensure it became effective.

LIQUIDITY AND CAPITAL RESOURCES

Overview

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, and in each fiscal year since our inception, we have incurred net losses which have resulted in ~~an accumulated~~a stockholders’ deficit of ~~$(358.5)~~$14.7 million ~~within stockholders’ equity~~ as of ~~March 31,~~September 30, 2022. Additionally, our operations have historically used more cash than they have provided. Net cash used in operating activities was ~~$8.7~~$13.6 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2022. As of ~~March 31,~~September 30, 2022, our cash balance was ~~$2.7~~$0.4 million.

Mudrick Loans

On December 3, 2021, we entered into the Original Mudrick Loan Agreements pursuant to which ~~we incurred the~~ Mudrick ~~Loans~~extended credit to us consisting of term loans in the aggregate principal amount of $30.0 million. The Mudrick Loans, as amended by the First Amendment, bear interest at 18.5% per annum (originally 16.5% per ~~annum,~~annum), which ~~shall be~~is payable on the last business day of each ~~month commencing on December 31, 2021.~~month. All amounts outstanding under the Mudrick Loans, as amended, including all accrued and unpaid interest, will be due and payable in full on October 31, 2022 (originally due on July 31, ~~2022.~~2022). To secure the payment and performance of the obligations under the Mudrick Loan Agreements, we, together with the Guarantors, have granted to TMI Trust Company, as the collateral agent for the benefit of Mudrick, a first priority lien on, and security interest in, all assets of Remark and the Guarantors, subject to certain customary exceptions. The Mudrick Loan Agreements contain representations, warranties, events of default, indemnifications and other provisions customary for financings of this type. The occurrence of any event of default


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under the Mudrick Loan Agreements may result in the principal amount outstanding and unpaid interest thereon becoming immediately due and payable. In connection with our entry into the Mudrick Loan Agreements, we paid to Mudrick an upfront fee equal to 5.0% of the amount of the Mudrick Loans, which amount was netted against the drawdown of the Mudrick ~~Loans and~~Loans. We recorded the upfront fee as a debt discount of $1.5 million, and recorded debt issuance cost totaling $1.1 million. We ~~are amortizing~~amortized the discount on the Mudrick Loans and the debt issuance cost over the life of the Mudrick ~~Loans.~~Loans and, during the nine months ended September 30, 2022, we amortized $2.2 million of such discount and debt issuance cost.

~~Since 2009,~~On August 3, 2022, we entered into the First Amendment with Mudrick, pursuant to which, Mudrick agreed, among other things, to (i) waive certain existing events of default under the Mudrick Loan Agreements, (ii) extend the original July 31, 2022 maturity date to October 31, 2022 (provided, however, that if we prepay the principal amount of the loans in an amount of at least $5 million, the maturity date will be automatically extended to November 30, 2022), and (iii) defer payment of interest for the month of July 2022 to August 31, 2022. In addition, on and after the effective date of the First Amendment, the outstanding loans under the Mudrick Loan Agreements will bear interest at 18.5% per annum, payable on the last business day of each month commencing on August 31, 2022. We have also agreed to commence marketing and sale efforts with respect to our Bikini.com business. In consideration for Mudrick’s agreement to enter into the First Amendment and extend the maturity date, we agreed to pay Mudrick an amendment and extension payment in the amount of 2.0% of the unpaid principal balance of the loans outstanding as of the date of the First Amendment, or approximately $0.3 million, which was added to the principal balance of the loans as of the effective date of the First Amendment.

On October 6, 2022, we also entered into the Mudrick Waiver to the Mudrick Loan Agreements. Pursuant to the Mudrick Waiver, Mudrick agreed, among other things, to (i) waive certain existing events of default under the Mudrick Loan Agreements, (ii) defer payment of interest for the months of July, August and September 2022 to October 6, 2022, the closing date of the Debenture Purchase Agreement, and (iii) consent to the issuance of the Debenture and the other transactions contemplated by the Debenture Purchase Agreement. In connection with the Mudrick Waiver, we became a party to a Subordination and Intercreditor Agreement with Mudrick and Ionic, pursuant to which Ionic agreed, among other things, that all of our obligations to Ionic under the Debenture will be fully and unconditionally junior and subordinate in right of cash payment to the prior satisfaction in full of our obligation to Mudrick.

We did not make the required repayment of the outstanding loans under the Mudrick Loan Agreements by October 31, 2022, the maturity date. This constitutes an event of default for which we have ~~held~~not received a waiver as of the date of this Form 10-Q. While we are actively engaged in discussions with Mudrick regarding a resolution of the event of default, we cannot provide any assurance that we will be successful in obtaining a waiver or that Mudrick will forebear from taking any enforcement actions against us. As of the date of this Form 10-Q, the principal amount outstanding, together with interest on the unpaid principal balance of the Mudrick Loan, is $14.4 million.

Ionic Transactions

On October 6, 2022, we entered into the Debenture Purchase Agreement with Ionic, pursuant to which we issued the Debenture in the original principal amount of $2,778,000 to Ionic for a purchase price of $2,500,000. The Debenture accrues interest at a rate of 8% per annum. The interest rate on the Debenture increases to a rate of 15% per annum if the Debenture is not fully paid or converted by February 6, 2023 or upon the occurrence of certain trigger events, including, without limitation, the suspension from trading or the delisting of our common stock from Nasdaq and the occurrence of any material adverse effect. In addition, if the Debenture is not fully paid or converted by the February 6, 2023, the original principal amount of the Debenture will be deemed to have been $3,334,000 from the issuance date. The Debenture matures on June 6, 2023. The terms of the Debenture are further described in Note 16 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this report.

Also, on October 6, 2022, we entered into the ELOC Purchase Agreement with Ionic, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Ionic to purchase up to an ~~interest in Legacy Sharecare. On July 1, 2021, Legacy Sharecare completed a business combination as a result~~aggregate of ~~which~~$50,000,000 of shares of our common stock over the 36-month term of the ELOC Purchase Agreement. Under the ELOC Purchase Agreement, after the satisfaction of certain commencement conditions, including, without limitation, the effectiveness of the Ionic Resale Registration Statement and that the Debenture shall have been fully converted into shares of common stock or shall otherwise have been fully redeemed and settled in all respects in accordance with the terms of ~~Legacy Sharecare that~~the Debenture, we ~~held immediately prior~~have the right to present Ionic with a Purchase Notice directing Ionic to purchase any amount up to $3,000,000 of our common stock per trading day, at the ~~business combination converted into approximately $2.3 million in cash and approximately 9.4 million~~Purchase Price equal to 90% (or 80% if our common stock is not then trading on Nasdaq) of the average of the 5 lowest VWAPs over a specified measurement period. With each purchase under the ELOC Purchase Agreement, we are required to deliver to Ionic an additional number of shares equal to 2.5% of the number of shares of ~~publicly-traded~~ common stock ~~of New Sharecare. As part of~~deliverable upon such purchase. See Note 16 in the ~~business combination, we signed a lock-up agreement with New Sharecare, pursuant~~Notes to ~~which we have agreed not to, subject to certain exceptions, transfer, assign or sell any of our New Sharecare common stock until~~Unaudited Condensed Consolidated Financial Statements included in this report for additional detail regarding the earlier to occur of: (i) one year after the effective time of the business combination, and (ii) subsequent to the effective time, if the closing price of New Sharecare common stock equals or exceeds $12.00 per share (asELOC Purchase Agreement.


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adjusted for stock splits, stock capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the effective time of the business combination (the “Lock-up Period”). Notwithstanding the foregoing, we are permitted under the lock-up agreement to sell our shares of New Sharecare common stock (x) beginning on the 180th day after the effective time of the business combination until the 269th day following the effective time, the greater of 5% of our shares as of the effective time and 750,000 shares, and (y) beginning on the 270th day after the effective time until the expiration of the Lock-up Period, the greater of 5% of our shares as of the effective time and 750,000 shares, plus any shares that were permitted to be, but not, transferred pursuant to clause (x) above.

Our history of recurring operating losses, working capital deficiencies and negative cash flows from operating activities give rise to substantial doubt regarding our ability to continue as a going concern.

We intend to fund our future operations and meet our financial obligations through revenue growth from our AI offerings, as well as through sales of our thermal-imaging products. We cannot, however, provide assurance that revenue, income and cash flows generated from our businesses will be sufficient to sustain our operations in the twelve months following the filing of this Form 10-Q. As a result, we are actively evaluating strategic alternatives including debt and equity ~~financings and potential sales of investment assets.~~financings.

Conditions in the debt and equity markets, as well as the volatility of investor sentiment regarding macroeconomic and microeconomic conditions (in particular, as a result of the COVID-19 pandemic, global supply chain disruptions, inflation and other cost increases, and the geopolitical conflict in Ukraine), will play primary roles in determining whether we can successfully obtain ~~additional capital. We cannot be certain that we will be successful at raising~~ additional capital.

•develop and grow new product line(s)

•~~monetize existing assets~~

•obtain additional capital through equity issuances.

Cash Flows - Operating Activities

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, we used ~~$3.2~~$3.5 million more cash in operating activities than we did during the same period of the prior year. The increase in cash used in operating activities is primarily the result of the timing of payments related to elements of working capital.

Cash Flows - Investing Activities

Investing activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 provided ~~$1.8~~$6.3 million in proceeds from the sale of a portion of our marketable ~~securities.~~securities, compared to $2.3 million received in the same period of 2021 from the transaction in which Legacy Sharecare became New Sharecare.

Cash Flows - Financing Activities

During the nine months ended September 30, 2022, we repaid $6.2 million of the Mudrick Loans and received $1.5 million of advances from senior management representing various operating expense payments made on our behalf, while the prior year period’s financing activity included $4.8 million of net debt proceeds plus $5.5 million of proceeds from issuances of our common stock shares.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.


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~~Cash Flows - Financing Activities~~

During the three months ended March 31, 2022, we repaid $3.7 million of the Mudrick Loans, while the prior year period’s financing activity included $4.8 million of net debt proceeds plus $0.8 million of proceeds from issuances of our common stock shares.

~~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

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to provide reasonable assurance that the information we must disclose in reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We designed our disclosure controls with the objective of ensuring we accumulate and communicate this information to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under Exchange Act, as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that, because of the material weaknesses in our internal control over financial reporting related to: (i) insufficient documentary evidence that we had reviewed information underlying manual journal entries at a sufficient level of detail, (ii) insufficient documentation of our consideration of appropriate revenue recognition criteria for certain contracts arising from our AI business in China, (iii) an aggregation of deficiencies in our monitoring and activity-level controls related to processes in our AI business in China including accounts payable, accrued liabilities, payroll and fixed assets, and (iv) failure to retain documentary evidence of all inventory purchases and the insufficient evaluation of the impact of discounted sales transactions on the valuation of our inventory, all of which we described in our 2021 Form 10-K, our disclosure controls and procedures were not effective at a reasonable assurance level as of ~~March 31,~~September 30, 2022.

Changes in Internal Control over Financial Reporting

In our 2021 Form 10-K, we disclosed that management had determined that material weaknesses in our internal control over financial reporting (described above) existed. As of the date of this report, the implementation of the plan developed by management to remediate the underlying causes of the material weaknesses and improve the design and operating effectiveness of internal control over financial reporting and our disclosure controls continues. Such implementation has been slowed by various factors, including the COVID-19 pandemic. As a result, there was no change in our internal control over financial reporting during such period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS


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Investing in our common stock involves a high degree of risk. You should carefully consider the risk factors set forth below together with the risk factors discussed in Part I, Item 1A of our 2021 Form 10-K, which could materially affect our business, financial condition or operating results. The risks described below and in our 2021 Form 10-K are not the only risks we face. Additional risks and uncertainties that we are unaware of may become important factors that affect us. If any of these risks actually occur, our business, financial condition or operating results may suffer, the trading price of our common stock could decline, and you may lose all or part of your investment.

Our concentration of customers could have a material adverse effect on us.


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Our concentration of customers could have a material adverse effect on us. During the nine months ended September 30, 2022, two of our customers represented about 55% and 23%, respectively, of our revenue for such period. During the nine months ended September 30, 2021, our two largest customers represented about 32% and 21%, respectively, of our revenue for such period. At September 30, 2022, accounts receivable from two of our customers represented about 32% and 18%, respectively, of our gross accounts receivable, while at December 31, 2021, accounts receivable from our three largest customers represented about 25%, 24% and 10%, respectively, of our gross accounts receivable. This concentration of customers leaves us exposed to the risks associated with the loss of one or more of these significant customers, which would materially and adversely affect our revenues and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~During the period covered by this Form 10-Q,~~On September 2, 2022, we ~~did not issue any unregistered equity securities.~~issued 1,250,000 shares of our common stock with a fair value of $0.5 million to a vendor in exchange for services performed.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

~~Not applicable.~~We did not make the required repayment of the outstanding loans under the Mudrick Loan Agreements by October 31, 2022, the maturity date. This constitutes an event of default for which we have not received a waiver as of the date of this Form 10-Q. While we are actively engaged in discussions with Mudrick regarding a resolution of the event of default, we cannot provide any assurance that we will be successful in obtaining a waiver or that Mudrick will forebear from taking any enforcement actions against us. As of the date of this Form 10-Q, the principal amount outstanding, together with interest on the unpaid principal balance of the Mudrick Loan, is $14.7 million.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

~~None~~None.


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ITEM 6. EXHIBITS

Incorporated Herein
By Reference To

~~Exhibit Number~~

~~Description~~

~~Document~~

~~Filed On~~

~~Exhibit Number~~

~~31.1~~

~~Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.~~

~~31.2~~

~~Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.~~

~~Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.~~

~~101~~

The following financial statements from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021; (ii) Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022 and 2021; (iii) Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2022 and 2021; (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021; and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

~~104~~

~~The cover page from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline XBRL (included as Exhibit 101).~~

Incorporated Herein
By Reference To

Exhibit Number

Description

Document

Filed On

Exhibit Number

4.1

Amended and Restated Subordinated Convertible Debenture, dated November 7, 2022, by and between Remark Holdings, Inc., and Ionic Ventures, LLC.

S-1

11/07/2022

4.8

10.1

2022 Incentive Plan

DEF 14A

04/29/2022

N/A

10.2

First Amendment to Senior Secured Loan Agreement, dated August 3, 2022, by and among, Remark Holdings Inc., certain of its subsidiaries and lender party thereto.

8-K

08/08/2022

10.1

10.3

Debenture Purchase Agreement, dated as of October 6, 2022, between Remark Holdings, Inc. and Ionic Ventures, LLC.

8-K

10/11/2022

10.1

10.4

Purchase Agreement, dated October 6, 2022, by and between Remark Holdings, Inc. and Ionic Ventures, LLC.

8-K

10/11/2022

10.2

10.5

Registration Rights Agreement, dated October 6, 2022, by and between Remark Holdings, Inc. and Ionic Ventures, LLC.

8-K

10/11/2022

10.3

10.6

Provisional Waiver and Consent Agreement, dated October 6, 2022, among Remark Holdings, Inc., certain of its subsidiaries party thereto, and Mudrick Capital Management, LP.

8-K

10/11/2022

10.4

10.7

Subordination and Intercreditor Agreement, dated October 6, 2022, among Ionic Ventures, LLC, Mudrick Capital Management, LP and Remark Holdings, Inc.

8-K

10/11/2022

10.5

10.8

Amendment No. 1 to Debenture Purchase Agreement, dated as of November 7, 2022, between Remark Holdings, Inc. and Ionic Ventures, LLC.

S-1

11/07/2022

10.2

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

101

The following financial statements from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021; (ii) Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2022 and 2021; (iii) Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the three and nine months ended September 30, 2022 and 2021; (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021; and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

104

The cover page from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL (included as Exhibit 101).


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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.

REMARK HOLDINGS, INC.

Date:

~~May 16,~~November 14, 2022

By:

/s/ Kai-Shing Tao

Kai-Shing Tao

Chairman and Chief Executive Officer

(principal executive, financial and accounting officer)


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PART I
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss	2
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)	3
	Unaudited Condensed Consolidated Statements of Cash Flows	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2827
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3938
Item 4.	Controls and Procedures	3938

PART II
Item 1.	Legal Proceedings	3938
Item 1A.	Risk Factors	3938
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4039
Item 3.	Defaults Upon Senior Securities	4039
Item 4.	Mine Safety Disclosures	4039
Item 5.	Other Information	4039
Item 6.	Exhibits	4140
	Signature	4241


Consolidating Balance Sheets (Unaudited)
March 31, 2022
($ in thousands)

	Corporate & Non-VIE Entities		VIEs		Eliminating Entries		Consolidated Total
Assets
Cash	$	2,604	$	87	$	—	$	2,691
Trade accounts receivable, net	4		11,289		—		11,293
Inventory, net	1,433		59		—		1,492
Investment in marketable securities	21,444		—		—		21,444
Prepaid expense and other current assets	3,520		4,753		—		8,273
Total current assets	29,005		16,188		—		45,193
Property and equipment, net	1,272		2		—		1,274
Operating lease assets	92		154		—		246
Investment in VIEs	9,011		—		(9,011)		—

Other long-term assets	375		28		—		403
Total assets	$	39,755	$	16,372	$	(9,011)	$	47,116
Liabilities
Accounts payable	$	4,244	$	5,855	$	—	$	10,099
Accrued expense and other current liabilities	2,612		2,589		—		5,201
Contract liability	306		126		—		432
Notes payable, net of unamortized discount and debt issuance cost	25,208		—		—		25,208

Total current liabilities	32,370		8,570		—		40,940

Operating lease liabilities, long-term	—		55		—		55

Total liabilities	32,370		8,625		—		40,995

Stockholders’ Equity
Preferred stock	—		—		—		—
Common stock	105		163		(163)		105
Additional paid-in-capital	364,753		30,368		(30,368)		364,753
Accumulated other comprehensive income	996		(1,289)		25		(268)
Accumulated deficit	(358,469)		(21,495)		21,495		(358,469)
Total stockholders’ equity	7,385		7,747		(9,011)		6,121
Total liabilities and stockholders’ equity	$	39,755	$	16,372	$	(9,011)	$	47,116