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 ~~September 30, 2022~~March 31, 2023

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 ~~November 11, 2022,~~May 19, 2023, a total of ~~106,407,769~~14,350,058 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)


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
		(Unaudited)					(Unaudited)
Assets	Assets					Assets
Cash	Cash	$	376	$	14,187	Cash	$	364	$	52
Trade accounts receivable, net	Trade accounts receivable, net	5,753		10,267		Trade accounts receivable, net	2,719		3,091
Inventory, net	Inventory, net	1,545		1,346		Inventory, net	309		308
Investment in marketable securities		—		42,349

Deferred cost of revenue	Deferred cost of revenue	5,630		589		Deferred cost of revenue	7,485		7,463
Prepaid expense and other current assets	Prepaid expense and other current assets	1,550		5,774		Prepaid expense and other current assets	1,275		1,374
Total current assets	Total current assets	14,854		74,512		Total current assets	12,152		12,288
Property and equipment, net	Property and equipment, net	1,404		357		Property and equipment, net	1,660		1,699
Operating lease assets	Operating lease assets	118		194		Operating lease assets	135		180
Other long-term assets	Other long-term assets	312		440		Other long-term assets	226		269
Total assets	Total assets	$	16,688	$	75,503	Total assets	$	14,173	$	14,436
Liabilities	Liabilities					Liabilities
Accounts payable	Accounts payable	$	9,202	$	10,094	Accounts payable	$	9,751	$	9,602
Advances from related parties	Advances from related parties	870		—		Advances from related parties	1,077		1,174
Obligations to issue common stock						Obligations to issue common stock	4,984		1,892
Accrued expense and other current liabilities	Accrued expense and other current liabilities	6,570		5,963		Accrued expense and other current liabilities	7,139		7,222
Contract liability	Contract liability	293		576		Contract liability	481		308
Notes payable, net of unamortized discount and debt issuance cost of $2,189 at December 31, 2021		14,418		27,811
Notes payable						Notes payable	16,488		14,607
Total current liabilities	Total current liabilities	31,353		44,444		Total current liabilities	39,920		34,805

Operating lease liabilities, long-term	Operating lease liabilities, long-term	25		25		Operating lease liabilities, long-term	30		56

Total liabilities	Total liabilities	31,378		44,469		Total liabilities	39,950		34,861

Commitments and contingencies	Commitments and contingencies					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
Stockholders’ Deficit						Stockholders’ Deficit
Preferred stock, 0.001 par value; 1,000,000 shares authorized; zero issued						Preferred stock, 0.001 par value; 1,000,000 shares authorized; zero issued	—		—
Common stock, 0.001 par value; 175,000,000 shares authorized; 13,633,992 and 11,539,564 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively						Common stock, 0.001 par value; 175,000,000 shares authorized; 13,633,992 and 11,539,564 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively	14		12
Additional paid-in-capital	Additional paid-in-capital	366,263		364,239		Additional paid-in-capital	372,071		368,945
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(1,137)		(270)		Accumulated other comprehensive loss	(1,177)		(859)
Accumulated deficit	Accumulated deficit	(379,922)		(333,040)		Accumulated deficit	(396,685)		(388,523)
Total stockholders’ equity (deficit)		(14,690)		31,034
Total liabilities and stockholders’ equity (deficit)		$	16,688	$	75,503
Total stockholders’ deficit						Total stockholders’ deficit	(25,777)		(20,425)
Total liabilities and stockholders’ deficit						Total liabilities and stockholders’ deficit	$	14,173	$	14,436

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 Income (Loss)

(dollars in thousands, except per share amounts)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
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	Revenue, including amounts from China Business Partner (See Note 15)		$	826	$	4,667
Cost and expense	Cost and expense									Cost and expense
Cost of revenue (excluding depreciation and amortization)	Cost of revenue (excluding depreciation and amortization)	2,459		854		8,576		5,858		Cost of revenue (excluding depreciation and amortization)		455		4,270
Sales and marketing	Sales and marketing	270		882		606		2,281		Sales and marketing		366		148

Technology and development	Technology and development	41		635		1,004		3,490		Technology and development		169		455
General and administrative	General and administrative	6,726		5,493		14,598		10,672		General and administrative		2,833		3,939
Depreciation and amortization	Depreciation and amortization	43		35		121		150		Depreciation and amortization		46		41

Total cost and expense	Total cost and expense	9,539		7,899		24,905		22,451		Total cost and expense		3,869		8,853
Operating loss	Operating loss	(6,727)		(6,665)		(14,868)		(12,795)		Operating loss		(3,043)		(4,186)
Other income (expense)	Other income (expense)									Other income (expense)
Interest expense	Interest expense	(1,365)		(438)		(5,325)		(1,053)		Interest expense		(1,544)		(2,186)
Finance cost related to obligations to issue common stock										Finance cost related to obligations to issue common stock		(3,576)		—

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

Gain on debt extinguishment		—		425		—		425

Loss on investment										Loss on investment		—		(19,056)
Other gain (loss), net	Other gain (loss), net	(493)		96		(342)		116		Other gain (loss), net		1		(1)
Total other income (expense), net		(2,206)		79,411		(32,023)		78,528
Total other expense, net										Total other expense, net		(5,119)		(21,243)
Loss before income taxes	Loss before income taxes	(8,933)		72,746		(46,891)		65,733		Loss before income taxes		(8,162)		(25,429)
Provision for income taxes	Provision for income taxes	9		—		9		(9)		Provision for income taxes		—		—
Net income (loss)		$	(8,924)	$	72,746	$	(46,882)	$	65,724
Net loss										Net loss		$	(8,162)	$	(25,429)
Other comprehensive income	Other comprehensive income									Other comprehensive income
Foreign currency translation adjustments	Foreign currency translation adjustments	(445)		(9)		(867)		46		Foreign currency translation adjustments		(318)		2
Comprehensive income (loss)		$	(9,369)	$	72,737	$	(47,749)	$	65,770
Comprehensive loss										Comprehensive loss		$	(8,480)	$	(25,427)

Weighted-average shares outstanding, basic		105,290,553		100,140,650		105,290,553		100,087,288
Weighted-average shares outstanding, diluted		105,290,553		100,379,533		105,290,553		100,409,650
Weighted-average shares outstanding, basic and diluted										Weighted-average shares outstanding, basic and diluted		13,004,071		10,515,777

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

Net income (loss) per share, basic and diluted										Net income (loss) per share, basic and diluted		$	(0.63)	$	(2.42)

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 105,157,769 $ 105 $ 365,263 $ (692) $ (370,998) (6,322)
Net loss — — — — (8,924) (8,924)
Share-based compensation — — 501 — — 501
Common stock issued for services 1,250,000 1 499 — — 500
Foreign currency translation — — — (445) — (445)
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 99,918,941 $ 100 $ 352,394 $ (171) $ (367,534) $ (15,211)
Net income — — — — 72,746 72,746
Share-based compensation — — 3,798 — — 3,798
Common stock and stock warrants issued for cash 4,237,290 4 4,610 — — 4,614
Equity instrument exercises 85,000 — 56 — — 56
Common stock issuance upon note payable conversion 876,493 1 1,104 — — 1,105
Reclassification of warrant liability to equity — — 1,602 — — 1,602
Foreign currency translation — — — (9) — (9)
Other (9,000) — — — — —
Balance at September 30, 2021 105,108,724 $ 105 $ 363,564 $ (180) $ (294,788) $ 68,701
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
Balance at December 31, 2021 105,157,769 $ 105 $ 364,239 $ (270) $ (333,040) $ 31,034
Net loss — — — — (46,882) (46,882)
Share-based compensation — — 1,525 — — 1,525
Common stock issued for services 1,250,000 1 499 — — 500
Equity instrument exercises — — — — — —
Foreign currency translation — — — (867) — (867)
Balance at September 30, 2022 106,407,769 $ 106 $ 366,263 $ (1,137) $ (379,922) $ (14,690)
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
Balance at December 31, 2020 99,505,041 $ 100 $ 351,546 $ (226) $ (360,512) $ (9,092)
Net income — — — — 65,724 65,724
Share-based compensation — — 3,823 — — 3,823
Common stock and stock warrants issued for cash 4,237,290 4 4,610 — — 4,614
Equity instrument exercises 498,900 — 879 — — 879
Common stock issuance upon note payable conversion 876,493 1 1,104 — — 1,105
Reclassification of warrant liability to equity — — 1,602 — — 1,602
Foreign currency translation — — — 46 — 46
Other (9,000) — — — — —
Balance at September 30, 2021 105,108,724 $ 105 $ 363,564 $ (180) $ (294,788) $ 68,701


























	Three Months Ended March 31, 2023
	Common Stock Shares	Common Stock Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
Balance at December 31, 2022	11,539,564	$	12	$	368,945	$	(859)	$	(388,523)	$	(20,425)
Net loss	—	—		—		—		(8,162)		(8,162)
Share-based compensation	—	—		143		—		—		143


Common stock issued upon note payable conversion	2,094,428	2		2,983		—		—		2,985

Foreign currency translation	—	—		—		(318)		—		(318)
Balance at March 31, 2023	13,633,992	$	14	$	372,071	$	(1,177)	$	(396,685)	$	(25,777)

	Three Months Ended March 31, 2022
	Common Stock Shares	Common Stock Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
Balance at December 31, 2021	10,515,777	$	11	$	364,333	$	(270)	$	(333,040)	$	31,034
Net loss	—	—		—		—		(25,429)		(25,429)
Share-based compensation	—	—		514		—		—		514




Foreign currency translation	—	—		—		2		—		2

Balance at March 31, 2022	10,515,777	$	11	$	364,847	$	(268)	$	(358,469)	$	6,121

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)


		Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021			2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net loss	Net loss	$	(46,882)	$	65,724	Net loss	$	(8,162)	$	(25,429)
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		—		(123)
Depreciation, amortization and impairments	Depreciation, amortization and impairments	121		150		Depreciation, amortization and impairments	46		41
Share-based compensation	Share-based compensation	1,185		3,497		Share-based compensation	156		429
Amortization of debt issuance costs and discount		2,189		312
Finance fee		283		—
Stock issuance for services performed		500		—

Cost of extending note payable						Cost of extending note payable	750		1,095
Finance cost related to obligations to issue common stock						Finance cost related to obligations to issue common stock	3,576		—
Accrued interest included in note payable						Accrued interest included in note payable	1,139		—

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

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

Financing cost of converting note payable to common stock		—		44
Provision for doubtful accounts	Provision for doubtful accounts	2,278		—		Provision for doubtful accounts	6		—
Other	Other	(178)		20		Other	(9)		43
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	1,298		(2,182)		Accounts receivable	84		(1,052)
Inventory	Inventory	(209)		(1,062)		Inventory	(1)		(146)
Deferred cost of revenue	Deferred cost of revenue	(5,041)		—		Deferred cost of revenue	(22)		(4,176)
Prepaid expense and other assets	Prepaid expense and other assets	3,815		241		Prepaid expense and other assets	176		2,281
Operating lease assets	Operating lease assets	63		238		Operating lease assets	47		(52)
Accounts payable, accrued expense and other liabilities	Accounts payable, accrued expense and other liabilities	826		2,047		Accounts payable, accrued expense and other liabilities	(1)		(666)
Contract liability	Contract liability	(245)		435		Contract liability	162		(142)
Operating lease liabilities	Operating lease liabilities	6		(146)		Operating lease liabilities	(27)		30
Net cash used in operating activities	Net cash used in operating activities	(13,635)		(10,117)		Net cash used in operating activities	(2,080)		(8,688)
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	6,332		2,322		Proceeds from sale of investment	—		1,849
Purchases of property, equipment and software	Purchases of property, equipment and software	(175)		(155)		Purchases of property, equipment and software	(4)		(10)
Payment of amounts capitalized to software in progress	Payment of amounts capitalized to software in progress	(999)		—		Payment of amounts capitalized to software in progress	—		(949)
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	5,158		2,167		Net cash provided by (used in) investing activities	(4)		890
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from issuance of common stock, net		—		5,494
Proceeds from debt issuance		—		4,770

Proceeds from obligations to issue common stock - ELOC						Proceeds from obligations to issue common stock - ELOC	1,000		—
Proceeds from obligations to issue common stock - Debentures						Proceeds from obligations to issue common stock - Debentures	1,500		—
Advances from related parties	Advances from related parties	2,386		—		Advances from related parties	259		—
Repayments of advances from related parties	Repayments of advances from related parties	(1,517)		—		Repayments of advances from related parties	(355)		—
Repayments of debt	Repayments of debt	(6,203)		—		Repayments of debt	(8)		(3,698)

Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	(5,334)		10,264		Net cash provided by (used in) financing activities	2,396		(3,698)
Net change in cash	Net change in cash	(13,811)		2,314		Net change in cash	312		(11,496)
Cash:	Cash:					Cash:
Beginning of period	Beginning of period	14,187		854		Beginning of period	52		14,187
End of period	End of period	$	376	$	3,168	End of period	$	364	$	2,691

Supplemental cash flow information:	Supplemental cash flow information:					Supplemental cash flow information:
Cash paid for interest	Cash paid for interest	$	3,238	$	—	Cash paid for interest	$	250	$	1,092

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

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~~Three Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

NOTE 1. ORGANIZATION AND BUSINESS

Organization and Business

Remark Holdings, Inc. and its subsidiaries (“Remark”, “we”, “us”, or “our”) constitute a diversified global technology business with leading artificial intelligence (“AI”) and data-analytics solutions. The common stock of Remark Holdings, Inc. is listed on the Nasdaq Capital Market (“Nasdaq”) under the ticker symbol MARK.

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

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 contractual arrangements between our wholly-foreign-owned enterprise (“WFOE”) and certain variable interest entities (“VIEs”) based in China to address challenges resulting from laws, policies and practices that may disfavor foreign-owned entities that operate within industries deemed sensitive by the Chinese government. We were the primary beneficiary of the VIEs because the contractual arrangements governing the relationship between the VIEs and our WFOE, which included an exclusive call option agreement, exclusive business cooperation agreement, a proxy agreement and an equity pledge agreement, enabled us to (i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive call option to purchase, at any time, all or part of the equity interests in and/or assets of the VIEs to the extent permitted by Chinese laws. Because we were the primary beneficiary of the VIEs, we consolidated the financial results of the VIEs in our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”).

We terminated all of the contractual arrangements between the WFOE and the VIEs and exercised our rights under the exclusive call option agreements between the WFOE and the VIEs such that, effective as of September 19, 2022, we obtained 100% of the equity ownership of the entities we formerly consolidated as VIEs and which we now consolidate as wholly-owned subsidiaries.

The following diagram illustrates our corporate structure, including our significant subsidiaries, as of the date of this Form 10-Q. The diagram omits certain entities which are immaterial to our results of operations and financial condition.


Table of Contents			5			Financial Statement Index

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


Table of Contents			6			Financial Statement Index

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

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

Holding Foreign Companies Accountable Act

The Holding Foreign Companies Accountable Act (the “HFCA Act”) was enacted on December 18, 2020. The HFCA Act states that if the Securities and Exchange Commission (the “SEC”) determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the Public Company Accounting Oversight Board (the “PCAOB”) for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market in the United States. On 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. The Consolidated Appropriations Act, 2023, which was signed into law on December 29, 2022, amended the HFCA Act to reduce the number of consecutive non-inspection years required to trigger the trading prohibition under the HFCA Act from three years to two years.

On December 16, 2021, the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by Chinese and Hong Kong authorities in those jurisdictions. 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,~~

On December 15, 2022, the PCAOB ~~shall have independent discretion to select any issuer audits for inspection or investigation~~vacated its 2021 determination that the positions taken by authorities in mainland China 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~~Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions. In view of the ~~Protocol, if~~PCAOB’s decision to vacate its 2021 determination and until such time as the PCAOB ~~continues~~issues any new adverse determination, the SEC has stated that there are no issuers at risk of having their securities subject to ~~be prohibited from conducting~~a trading prohibition under the HFCA Act. Each year, the PCAOB will reassess its determinations on whether it can inspect and investigate completely audit firms in China, and if, in the future, the PCAOB determines it cannot do so, or if Chinese authorities do not allow the PCAOB complete access for inspections and investigations ~~of PCAOB-registered~~for two consecutive years, companies engaging China-based public accounting firms ~~in China, then China-based companies will~~would 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.~~our common stock.


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Transfer of Cash or Assets

Dividend Distributions

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

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

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

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

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

COVID-19

Our consolidated financial statements for the ~~nine~~three months ended ~~September 30, 2022 were impacted by~~March 31, 2023 continued to show the ~~effects of the COVID-19 pandemic. The response to~~negative impact that the COVID-19 pandemic ~~will likely~~has had on our business. Preventative measures related to COVID-19 outbreaks may continue to adversely affect our business and financial results, as could economic and geopolitical conditions in some international regions, and we do not yet know what will be the ultimate effects on our business. The COVID-19 pandemic caused a broad shift towards remote working arrangements for many businesses worldwide and injected uncertainty and delay into decision-making processes for such businesses. ~~Varying degrees of~~Though the most restrictive preventative measures ~~are still~~have been eased 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,~~measures could be reinstituted at any time. Recovering from the effects of the preventative measures in China ~~as a result of~~that resulted from the Chinese government’s ~~“Zero-COVID”~~Zero-COVID policy ~~have~~and that significantly limited the operational capabilities of our China-based ~~subsidiaries.~~subsidiaries has taken some time as we and our customers and partners work to ramp up business again. Many cities across large swaths of China, ~~have~~including economically significant regions such as Shanghai, as recently ~~been~~as the end of 2022 were fully or partially locked down for weeks or even ~~months, including economically significant regions such as Shanghai.~~months. Such lockdowns have had a material adverse impact on our business, including on the collection of our accounts receivable and ~~we expect them~~our ability to complete projects in China to generate revenue, and may continue to ~~have a material adverse~~adversely impact on our business until customers and potential customers believe they can operate and expand their ~~imposition is ceased.~~businesses without fear of lockdowns or other severely restrictive preventative measures.

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


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Going Concern

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, and in each fiscal year since our inception, we have incurred operating losses which have resulted in a stockholders’ deficit of ~~$14.7~~$25.8 million as of ~~September 30, 2022.~~March 31, 2023. 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 ~~$13.6~~$2.1 million during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. As of ~~September 30, 2022,~~March 31, 2023, our cash balance was $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,~~2022, has also expressed substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

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

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

•develop and grow new product line(s)

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

However, projections are inherently uncertain and the success of our plans is largely outside of our control. As a result, there is substantial doubt regarding our ability to continue as a going concern, and we may fully utilize our cash resources prior to ~~December 31, 2022.~~June 30, 2023.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of ~~September 30, 2022,~~March 31, 2023, with the audited Consolidated Balance Sheet amounts as of December 31, ~~2021~~2022 presented for comparative purposes, and the related unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss, the Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Stockholders’ Deficit in accordance with the instructions for Form 10-Q. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP, though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.

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

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


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Statement of Stockholders’ Deficit, each as of ~~September 30, 2022,~~March 31, 2023, as well as our unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss and Condensed Consolidated Statements of Cash Flows for all periods presented. You should read our unaudited condensed consolidated interim financial statements and footnotes in conjunction with our


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consolidated financial statements and footnotes included within the Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (the ~~“2021~~“2022 Form 10-K”).

Consolidation

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

Use of Estimates

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

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

Cash

Our cash consists of funds held in bank accounts.

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


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Cash denominated in:	Cash denominated in:					Cash denominated in:
USD	USD	$	5	$	13,278	USD	$	238	$	11
RMB	RMB	199		259		RMB	66		19
GBP	GBP	166		644		GBP	5		17
HKD	HKD	6		6		HKD	55		5
Total cash	Total cash	$	376	$	14,187	Total cash	$	364	$	52

We maintain substantially all of our USD-denominated cash at a U.S. financial institution where the balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At times, however, our cash balances may exceed the FDIC-insured limit. As of ~~September 30, 2022,~~March 31, 2023, we do not believe we have any significant concentrations of credit risk. Cash held by our non-U.S. subsidiaries is subject to foreign currency fluctuations against the USD, although such risk is somewhat mitigated because we transfer U.S. funds to China to fund local operations. If, however, the USD is devalued significantly against the RMB, our cost to further develop our business in China could exceed original estimates.


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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. Our overseas subsidiaries, however, maintain their books and records in their functional currencies, which are GBP in the United Kingdom (“U.K.”) and RMB in China.

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

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


	2023	2022
Exchange rates at March 31st:
GBP:USD	1.237	1.313
RMB:USD	0.146	0.158
HKD:USD	0.127	0.128

Average exchange rate during the three months ended March 31st:
RMB:USD	0.146	0.158
GBP:USD	1.214	1.317


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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
Exchange rates at September 30th:
GBP:USD 1.113 —
RMB:USD 0.141 0.155
HKD:USD 0.127 0.129
Average exchange rate during the nine months ended September 30th:
RMB:USD 0.152 0.156
GBP:USD 1.259 —

Revenue Recognition

AI-Based Products

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

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

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

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

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

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

We offer extended warranties on our products for periods of 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.~~services. 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 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 ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, reserve for inventory was ~~$0.9~~$2.2 million and ~~$1.0~~$2.2 million, respectively.

Refundable Tax Credits

We charge the cost of our research and development efforts to operations as incurred. Our subsidiary in the United Kingdom is entitled to receive certain government assistance in the form of refundable research and development tax credits from taxation authorities, based on qualifying expenditures incurred during the fiscal year. The refundable credits are not dependent on our ongoing tax status or tax position and accordingly are not considered part of income taxes. We record refundable tax credits as a reduction of technology and development expense when we can reasonably estimate the amount and it is more likely than not that such amount will be received. During the three months ended March 31, 2023, we recorded a tax credit of approximately $0.5 million.

Internal Use Software

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

Net Income (Loss) per Share

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

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ there were no reconciling items related to either the ~~numerators of the net income (loss) per share calculations. The following table presents a reconciliation of the~~numerator or denominator of the ~~basic net income (loss)~~loss per share calculation, ~~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
as their effect would have been anti-dilutive.

Securities which may have affected the calculation of diluted earnings per share for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 if their effect had been dilutive include ~~15,123,752~~1,626,346 total outstanding stock options, and ~~10,114,408~~1,011,440 outstanding warrants 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 one operating segment.


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Recently Issued Accounting Pronouncements

In ~~June 2016,~~August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2016-13~~2020-06 (“ASU ~~2016-13”~~2020-06”), ~~Measurement of Credit Losses on Financial~~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 ~~(Topic 326)~~and Contracts in an Entity’s Own Equity. The ASU ~~requires entities to use a forward-looking approach based on current expected credit losses to estimate credit losses on certain types~~will simplify the accounting for convertible instruments by reducing the number of ~~financial~~accounting models for convertible debt instruments ~~including trade receivables, which may~~and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the ~~earlier recognition~~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 ~~allowances~~a derivative, and that do not qualify for ~~losses.~~a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The ASU also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. With regard to our financial reporting, ASU ~~2016-13~~2020-06 will be effective ~~beginning~~ January 1, ~~2023,~~2024, and early adoption is ~~permitted.~~permitted, but no earlier than January 1, 2021, including interim periods within that year. We are currently evaluating what effect(s) the adoption of ASU 2020-06 may have on our consolidated financial statements, but we do not believe the impact of the ASU will be material to our financial position, results of operations and cash flows. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.

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

NOTE 3. CONCENTRATION OF RISK

Revenue and Accounts Receivable

The disaggregation of revenue tables in Note 4 demonstrate the concentration in our revenue from certain products and the geographic concentration of our business. We also have a concentration in the volume of business we transacted with customers, as during the ~~nine~~three months ended ~~September 30, 2022, two~~March 31, 2023, one of our customers represented about ~~55% and 23%, respectively,~~50% of our revenue, while during ~~nine~~three months ended ~~September 30, 2021, our~~March 31, 2022, two ~~largest~~ customers represented about ~~32%~~48% and ~~21%~~46%, respectively, of our revenue. At ~~September 30, 2022,~~March 31, 2023, accounts receivable from ~~two~~four of our customers represented about ~~32%~~26%, 11%, 11% and ~~18%~~10%, respectively, of our gross accounts receivable, while at December 31, ~~2021,~~2022, accounts receivable from our three largest customers represented about ~~25%~~23%, ~~24%~~16% and 10%, respectively, of our gross accounts receivable.

Deferred Cost of Revenue

See Note 6 for a discussion of a risk concentration regarding our deferred cost of revenue.

Cost of Sales and Accounts Payable

The various hardware we purchase to fulfill our contracts with customers is not especially unique in nature. Based on our analysis, we believe that should any disruption in our current supply chain occur, a sufficient number of alternative vendors is available to us, at reasonably comparable specifications and price, such that we would not experience a material negative impact on our ability to procure the hardware we need to operate our business.

NOTE 4. REVENUE

We primarily sell AI-based products and services based upon computer vision and other technologies.


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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.


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Disaggregation of Revenue

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
AI-based products and services, including amounts from China Business Partner in 2022 (See Note 15)		$	2,681	$	834	$	9,699	$	8,706
AI-based products and services, including amounts from China Business Partner in 2023 (See Note 15)										AI-based products and services, including amounts from China Business Partner in 2023 (See Note 15)		$	721	$	4,546
Other	Other	131		400		338		950		Other		105		121
Revenue	Revenue	$	2,812	$	1,234	$	10,037	$	9,656	Revenue		$	826	$	4,667

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
China	China	$	2,746	$	840	$	9,815	$	6,053	China		$	743	$	4,554
United States	United States	66		394		222		3,603		United States		83		113

Revenue	Revenue	$	2,812	$	1,234	$	10,037	$	9,656	Revenue		$	826	$	4,667

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 ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, our contract liability changed only as a result of routine business activity.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the amount of revenue we recognized that was included in the beginning balance of Contract liability was not material.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we did not recognize revenue from performance obligations that were satisfied in previous periods.


Table of Contents			15			Financial Statement Index

NOTE 5. TRADE ACCOUNTS RECEIVABLE


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Gross accounts receivable balance	Gross accounts receivable balance	$	9,184	$	11,551	Gross accounts receivable balance	$	6,885	$	7,213
Allowance for bad debt	Allowance for bad debt	(3,431)		(1,284)		Allowance for bad debt	(4,166)		(4,122)
Accounts receivable, net	Accounts receivable, net	$	5,753	$	10,267	Accounts receivable, net	$	2,719	$	3,091


~~Table of Contents~~			15			~~Financial Statement Index~~

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.TradeTrade receivables related to our ~~China-based subsidiaries~~China AI projects at March 31, 2023 and December 31, 2022; including ~~$3.0~~approximately $1.1 million and $1.1 million, respectively, of trade receivables from projects related to work with our China Business Partner (see Note 15 for more information regarding our China Business Partner and related accounting)~~, represent 99% of~~; represented essentially all our gross trade ~~receivables.~~receivables in each such period. Despite the longer collection timelines normally observed with Chinese entities, we have noted that the COVID-19 related lockdowns that persisted in China for most of 2022 have caused further delay in our ability to collect all balances due from some of our customers in China. As a result of our inability to assure collection of all amounts due from such customers within a short period of time, we recorded a reserve for bad debt of approximately $2.8 million as of December 31, 2022 for all accounts receivable from China customers that were more than one year past due.

NOTE 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 December 31, 2021, the value of our 9,431,920 shares of common stock of New Sharecare was $42.3 million based upon the closing stock price of New Sharecare, an input we classify in Level 1 of the fair value hierarchy. We sold 3,181,920 shares of New Sharecare during the nine months ended September 30, 2022 for cash of $6.3 million.DEFERRED COST OF REVENUE

~~On July 2,~~Deferred cost of revenue as of March 31, 2023 and December 31, 2022 of $7.5 million and $7.5 million, respectively, represent amounts we ~~received~~have paid in advance to the vendor who provides services to us in relation to various projects in China. Specifically, the deferred cost of revenue balance as of March 31, 2023, a ~~Notice~~large percentage of ~~Trigger Event and Mandatory Payment from~~which was related to project installations we expected would be provided to us through our ~~senior lenders, which required that we make a prepayment of our senior secured loans (which are described~~China Business Partner (described in more detail in Note 1115), was paid almost entirely to a single vendor which will be visiting numerous sites across various regions of China to install our software solutions and/or hardware for our customers and perform other services for us pursuant to our customers’ requirements. Because most of the projects for which we have engaged the vendor require purchases of hardware, equipment and/or supplies in advance of site visits, we made the prepayments during 2022 in anticipation of several large batches of project installations. However, the lengthy COVID-19 related lockdowns that occurred in various regions in China prevented us and the vendor from being able to complete as many projects as we originally expected and caused our customers to delay installations. Given that the delays were related to the COVID-19 lockdowns that had ended by ~~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,~~December 31, 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 aswere not a result of the vendor’s inability to either perform the services or refund of the amounts we ~~no longer own any equity interests in New Sharecare~~advanced, we believe the balance as of ~~such date.~~March 31, 2023 will be fully recovered.

~~The total net loss on investment during the nine months ended September 30, 2022 was $26.4 million.~~

NOTE 7. PREPAID EXPENSE AND OTHER CURRENT ASSETS

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


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Receivable from China Business Partner (See Note 15)		$	—	$	3,980

Other receivables	Other receivables	7		9		Other receivables	10		23
Prepaid expense	Prepaid expense	1,285		1,558		Prepaid expense	1,057		1,144
Deposits	Deposits	252		221		Deposits	203		201

Other current assets	Other current assets	6		6		Other current assets	5		6
Total	Total	$	1,550	$	5,774	Total	$	1,275	$	1,374


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NOTE 8. PROPERTY AND EQUIPMENT

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


		Estimated Life (Years)	September 30, 2022		December 31, 2021			Estimated Life (Years)	March 31, 2023		December 31, 2022
Vehicles	Vehicles	3	$	153	—		Vehicles	3	$	153	153
Computers and equipment	Computers and equipment	3	1,132		$	1,133	Computers and equipment	3	1,172		$	1,170
Furniture and fixtures	Furniture and fixtures	3	42		42		Furniture and fixtures	3	42		42
Software	Software	3	4,886		5,055		Software	3	5,168		5,160
Leasehold improvements	Leasehold improvements	3	203		196		Leasehold improvements	3	202		204
Software development in progress	Software development in progress		1,136		128		Software development in progress		1,199		1,199
Total property, equipment and software	Total property, equipment and software		$	7,552	$	6,554	Total property, equipment and software		$	7,936	$	7,928
Less accumulated depreciation	Less accumulated depreciation		(6,148)		(6,197)		Less accumulated depreciation		(6,276)		(6,229)
Total property, equipment and software, net	Total property, equipment and software, net		$	1,404	$	357	Total property, equipment and software, net		$	1,660	$	1,699

For the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ depreciation (and amortization of software) expense was ~~$0.1 million and $0.2 million, respectively.~~de minimis.

~~NOTE 9. LEASES~~

~~We 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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Operating lease expense $ 65 $ 73 $ 206 $ 236
Short-term lease expense 430 182 1,211 812
Lease expense $ 495 $ 255 $ 1,417 $ 1,048

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

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


~~Table of Contents~~			17			~~Financial Statement Index~~

~~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 September 30, 2022 Consolidated Balance Sheet (in thousands):


~~Operating lease liabilities maturing during the next:~~
~~One year~~	$	~~116~~
~~Two years~~	26




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

~~Lease liabilities on balance sheet:~~
~~Short-term (included in~~ ~~accrued expenses~~ - ~~Note 10~~)	$	~~108~~
~~Long-term~~	25
~~Total lease liabilities~~	$	~~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 ~~10.~~9. ACCRUED EXPENSE AND OTHER CURRENT LIABILITIES

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


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Accrued compensation and benefit-related expense	Accrued compensation and benefit-related expense	$	1,109	$	821	Accrued compensation and benefit-related expense	$	2,007	$	1,448
Accrued interest	Accrued interest	713		385		Accrued interest	167		769
Other accrued expense	Other accrued expense	1,368		1,073		Other accrued expense	2,430		2,393
Other payables	Other payables	2,145		2,324		Other payables	2,224		2,234
Registration rights agreement penalty (see Note 12)		800		600
Operating lease liability - current	Operating lease liability - current	108		187		Operating lease liability - current	120		138
China Cash Bonuses (see N ote 13)		99		439
China Cash Bonuses (see Note 15)						China Cash Bonuses (see Note 15)	44		32
Other current liabilities	Other current liabilities	228		134		Other current liabilities	147		208
Total	Total	$	6,570	$	5,963	Total	$	7,139	$	7,222

NOTE 10. NOTES PAYABLE

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




	March 31, 2023		December 31, 2022
Principal balance of Original Mudrick Loans	$	16,307	$	14,418
Other notes payable	181		189
Notes payable, net of unamortized discount and debt issuance cost	$	16,488	$	14,607


Table of Contents			1817			Financial Statement Index

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

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

September 30, 2022 December 31, 2021
Principal balance of Mudrick Loans $ 14,418 $ 30,000
Unamortized discount and debt issuance cost — (2,189)
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 ~~(as amended, the “Mudrick~~(the “Original Mudrick Loans”). The Original Mudrick Loans ~~as amended, bear~~bore interest at 16.5% per annum until the original maturity date of July 31, 2022 and, following an amendment we entered into with Mudrick in August 2022, bore interest at 18.5% per annum. The amendment also extended the maturity date of the Original Mudrick Loans from July 31, 2022 to October 31, 2022. However, we did not make the required repayment of the Original Mudrick Loans by October 31, 2022, which constituted an event of default under the Original Mudrick Loans and triggered an increase in the interest rate under the Original Mudrick Loans to 20.5%.

On March 14, 2023, we entered into a Note Purchase Agreement (the “New Mudrick Loan Agreement”) with Mudrick, pursuant to which all of the Original Mudrick Loans were cancelled in exchange for new notes payable to Mudrick (the “New Mudrick Notes”) in the aggregate principal amount of approximately $16.3 million. The principal balance of the New Mudrick Notes included the $14.4 million outstanding balance of the Original Mudrick Loans, plus $1.1 million of accrued interest on the Original Mudrick Loans, plus a fee of approximately $0.8 million payable to Mudrick as consideration for cancelling the Original Mudrick Loans and converting all amounts outstanding thereunder into the New Mudrick Notes. We recorded the $0.8 million as interest expense during the three months ended March 31, 2023.

The New Mudrick Notes bear interest at a rate of 20.5% per annum, ~~(originally 16.5% per annum),~~ which isshall be payable on the last business day of each ~~month.~~month commencing on May 31, 2023. The interest rate will increase by 2% and the principal amount outstanding under the New Mudrick Notes and any unpaid interest thereon may become immediately due and payable upon the occurrence of any event of default under the New Mudrick Loan Agreement. All amounts outstanding under the New Mudrick ~~Loans, as amended,~~Notes, including all accrued and unpaid interest, will be due and payable in full on October 31, ~~2022 (originally due on July 31, 2022).~~ 2023.

To secure the payment and performance of the obligations under the Original Mudrick Loan Agreements and the New Mudrick Loan Agreement, we, together with 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 Original Mudrick Loan Agreements, we paid to Mudrick an upfront fee equal to 5.0% of the amount of the Original Mudrick Loans, which amount was netted against the drawdown of the Original Mudrick Loans. We recorded the upfront fee as a debt discount of $1.5 million, and recorded debt issuance cost totaling $1.1 million. We amortized the discount on the Original Mudrick Loans and the debt issuance cost over the life of the Original Mudrick Loans and, during the ~~nine months~~year ended ~~September 30,~~December 31, 2022, we amortized $2.2 million of such discount and debt issuance cost.

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~~year ended ~~September 30,~~December 31, 2022, we repaid $6.2 million of the principal ~~and, as described~~amount of the Original Mudrick Loans in ~~more detail in~~ ~~Note 6, we~~cash and delivered all ~~remaining~~of our shares ~~of New~~in Sharecare, Inc. to Mudrick on July 11, 2022, in partial settlement of the Original Mudrick Loans, resulting in a ~~reduction~~further repayment of approximately $9.7 million of ~~principal.~~the principal amount of the Original Mudrick Loans. As of December 31, 2022, the outstanding balance of the Original Mudrick Loans was $14.4 million, and approximately $0.8 million of accrued interest was included in Accrued expense and other current liabilities. During the three months ended March 31, 2023, we accrued approximately $0.6 million additional interest expense on the Original Mudrick Loans, of which $0.3 million was paid during the period.

Other Notes Payable

The Other notes payable in the table above represent individually immaterial notes payable issued for the purchase of operating assets. Such notes payable bear interest at a weighted-average interest rate of approximately 6.2% and have a weighted-average remaining term of approximately 4.8 years.


Table of Contents			18			Financial Statement Index

NOTE 11. TRANSACTIONS WITH IONIC

Convertible Debentures

On October 6, 2022, we entered into a debenture purchase agreement (the “2022 Debenture Purchase Agreement”) and a purchase agreement (the “ELOC Purchase Agreement”) with Ionic Ventures, LLC (“Ionic”). Pursuant to the 2022 Debenture Purchase Agreement, we issued a convertible subordinated debenture in the original principal amount of approximately $2.8 million (the “2022 Debenture”) to Ionic for a purchase price of $2.5 million. The 2022 Debenture automatically converted into shares of our common stock (the “Settlement Shares”) on November 17, 2022 upon the effectiveness of a registration statement we filed pursuant to a registration rights agreement we entered into with Ionic. Upon issuance of the 2022 Debenture, we initially estimated the obligation to issue common stock at approximately $3.6 million. As of December 31, 2022, we estimated such obligation to have a fair value of $1.9 million, representing an additional 1,720,349 shares to be issued pursuant to the 2022 Debenture. When the measurement period for determining the conversion price of the 2022 Debenture was completed, we determined that the number of conversion shares to be issued to Ionic upon automatic conversion of the 2022 Debenture was 3,129,668 shares of our common stock. As of March 31, 2023, we had issued an aggregate of 2,993,282 shares of common stock upon automatic conversion of the 2022 Debenture (inclusive of 898,854 shares that were issued during 2022), leaving a balance of 136,386 shares that remained to be issued, representing an obligation with a fair value of $0.2 million.

On March 14, 2023, we entered into a new debenture purchase agreement (the “2023 Debenture Purchase Agreement”) with Ionic pursuant to which we authorized the issuance and sale of two convertible subordinated debentures in the aggregate principal amount of approximately $2.8 million for an aggregate purchase price of $2.5 million. The first debenture is in the original principal amount of approximately $1.7 million for a purchase price of $1.5 million (the “First 2023 Debenture”), which was issued on March 14, 2023, and the second debenture is in the original principal amount of approximately $1.1 million for a purchase price of $1.0 million (the “Second 2023 Debenture” and collectively with the First Debenture, the “2023 Debentures”), which was issued on April 12, 2023. Upon issuance of the First 2023 Debenture, we initially estimated the obligation to issue common stock at approximately $2.5 million. As of March 31, 2023, the First 2023 Debenture had not been converted into any shares of common stock and we estimated that 2,232,590 shares would be issued upon conversion of the First 2023 Debenture, representing an obligation with a fair value of $3.1 million.

The 2023 Debentures accrue interest at a rate of 10% per annum, of which two years of interest is guaranteed and deemed earned in full on the first day following the issuance date. The interest rate on the 2023 Debentures increases to a rate of 15% per annum if the 2023 Debentures are not fully paid, converted or redeemed by the second anniversary of each debenture (each, a “Maturity Date”) or upon the occurrence of certain trigger events, including, but not limited to, the suspension from trading or the delisting of our common stock from Nasdaq for three consecutive trading days. If the 2023 Debentures are not fully paid or converted by their respective Maturity Dates, the original aggregate principal amount of the 2023 Debentures will be deemed to have been approximately $3.3 million from their issuance dates.

The 2023 Debentures automatically convert into shares of common stock at the earlier of (i) the effectiveness of the initial registration statement registering the resale of certain Registrable Securities as such term is defined in the Registration Rights Agreement (as defined below) including, without limitation, the shares issuable upon conversion of the 2023 Debentures (the “Conversion Shares”) (such registration statement, the “Resale Registration Statement”), and (ii) 181 days after the issuance date of each 2023 Debenture. The number of shares of common stock issuable upon conversion of each 2023 Debenture shall be determined by dividing the outstanding balance under each 2023 Debenture (including all accrued and unpaid interest and accrued and unpaid late charges, if any) by a conversion price that is the lower of (x) 80% (or 70% if our common stock is not then trading on Nasdaq) of the average of the two lowest VWAPs over a specified measurement period following the conversion date (the “Variable Conversion Price”), and (y) $1.40 (the “Fixed Conversion Price”), subject to full ratchet anti-dilution protection in the event we issue certain equity securities at a price below the then Fixed Conversion Price. The 2023 Debentures are unsecured and expressly junior to any of our existing or future debt obligations. Notwithstanding anything to the contrary, under no circumstances shall the Variable Conversion Price be less than the floor price of $0.20 as specified in the 2023 Debentures. Additionally, in the event of a bankruptcy, we are required to redeem the 2023 Debentures in cash in an amount equal to the then outstanding balance of the 2023 Debentures multiplied by 120%. The 2023 Debentures further provide that we will not effect the conversion of any portion of the 2023 Debentures, and the holder thereof will not have the right to a conversion of any portion of the 2023 Debentures, to the extent that after giving effect to such conversion, the holder together with its affiliates would beneficially own more than 4.99% of the outstanding shares of our common stock immediately after giving effect to such conversion. Furthermore, we may not issue shares of common stock underlying the 2023 Debentures if such issuance would require us to obtain stockholder approval under the Nasdaq rules or until such stockholder approval has been obtained.

Concurrently with entering into the 2023 Debenture Purchase Agreement, we also entered into a registration rights agreement with Ionic (the “2023 Registration Rights Agreement”), in which we agreed to file with the SEC one or more registration statements, as necessary, and to the extent permissible and subject to certain exceptions, to register under the


Table of Contents			19			Financial Statement Index

Securities Act of 1933, as amended, the resale of the shares of our common stock issuable upon conversion of the 2023 Debentures and the shares of common stock that may be issued to Ionic if we fail to comply with our obligations in the 2023 Registration Rights Agreement. The 2023 Registration Rights Agreement requires that we file, within 15 calendar days after we file our 2022 Form 10-K, a resale registration statement and use commercially reasonable efforts to have such resale registration statement declared effective by the SEC on or before the earlier of (i) 90 days after signing of the 2023 Registration Rights Agreement (or 120 days if such registration statement 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 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 two 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 2023 Debentures for failure to file and have the Resale Registration Statement declared effective by the same deadlines set forth above for each 30-day period after each such failure.

Equity Line of Credit

The ELOC Purchase Agreement, as amended (see below), provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Ionic to purchase up to an aggregate of $50.0 million of shares of our common stock over the 36-month term of the ELOC Purchase Agreement. Under the ELOC Purchase Agreement, after the satisfaction of certain commencement conditions, including, without limitation, the effectiveness of a resale registration statement filed with the SEC registering such shares and that the 2022 Debenture shall have been fully converted into shares of common stock or shall otherwise have been fully redeemed and settled in all respects in accordance with the terms of the 2022 Debenture, we have the right to present Ionic with a purchase notice (each, a “Purchase Notice”) directing Ionic to purchase any amount up to $3.0 million of our common stock per trading day, at a per share price equal to 90% (or 80% if our common stock is not then trading on Nasdaq) of the average of the two lowest volume-weighted average prices (“VWAPs”) over a specified measurement period. With each purchase under the ELOC Purchase Agreement, we are required to deliver to Ionic an additional number of shares equal to 2.5% of the number of shares of common stock deliverable upon such purchase. The number of shares that we can issue to Ionic from time to time under the ELOC Purchase Agreement shall be subject to the condition that we will not sell shares to Ionic to the extent that Ionic, together with its affiliates, would beneficially own more than 4.99% of the outstanding shares of our common stock immediately after giving effect to such sale (the “Beneficial Ownership Limitation”).

In addition, Ionic will not be required to buy any shares of our common stock pursuant to a Purchase Notice on any trading day on which the closing trade price of our common stock is below $0.20 (as amended by the Letter Agreement, as defined below). We will control the timing and amount of sales of our common stock to Ionic. Ionic has no right to require any sales by us, and is obligated to make purchases from us as directed solely by us in accordance with the ELOC Purchase Agreement. The ELOC Purchase Agreement provides that we will not be required or permitted to issue, and Ionic will not be required to purchase, any shares under the ELOC Purchase Agreement if such issuance would violate Nasdaq rules, and we may, in our sole discretion, determine whether to obtain stockholder approval to issue shares in excess of 19.99% of our outstanding shares of common stock if such issuance would require stockholder approval under Nasdaq rules. Ionic has agreed that neither it nor any of its agents, representatives and affiliates will engage in any direct or indirect short-selling or hedging our common stock during any time prior to the termination of the ELOC Purchase Agreement.

The ELOC Purchase Agreement may be terminated by us at any time after commencement, at our discretion; provided, however, that if we sold less than $25.0 million to Ionic (other than as a result of our inability to sell shares to Ionic as a result of the Beneficial Ownership Limitation, our failure to have sufficient shares authorized or our failure to obtain stockholder approval to issue more than 19.99% of our outstanding shares), we will pay to Ionic a termination fee of $0.5 million, which is payable, at our option, in cash or in shares of common stock at a price equal to the closing price on the day immediately preceding the date of receipt of the termination notice. Further, the ELOC Purchase Agreement will automatically terminate on the date that we sell, and Ionic purchases, the full $50.0 million amount under the agreement or, if the full amount has not been purchased, on the expiration of the 36-month term of the ELOC Purchase Agreement.

On January 5, 2023, we and Ionic entered into a letter agreement (the “Letter Agreement”) which amended the ELOC Purchase Agreement. Under the Letter Agreement, the parties agreed, among other things, to (i) amend the floor price below which Ionic will not be required to buy any shares of our common stock under the ELOC Purchase Agreement from $0.25 to $0.20, determined on a post-reverse split basis, (ii) amend the per share purchase price for purchases under the ELOC Purchase Agreement to 90% of the average of the two lowest daily VWAPs over a specified measurement period, which will commence at the conclusion of the applicable measurement period related to the 2022 Debenture and (iii) waive certain requirements in the ELOC Purchase Agreement to allow for a one-time $0.5 million purchase under the ELOC Purchase Agreement.


Table of Contents			20			Financial Statement Index

As partial consideration for the waiver to allow for the $0.5 million purchase by Ionic, we agreed to issue to Ionic that number of shares (the “Letter Agreement Shares”) equal to the difference between (x) the variable conversion price in the 2022 Debenture, and (y) the calculation achieved as a result of the following formula: 80% (or 70% if our common stock is not then trading on Nasdaq) of the lowest VWAP starting on the trading day immediately following the receipt of pre-settlement conversion shares following the date on which the 2022 Debenture automatically converts or other relevant date of determination and ending the later of (a) 10 consecutive trading days after (and not including) the Automatic Conversion Date (as defined in the ELOC Agreement) or such other relevant date of determination and (b) the trading day immediately after shares of our common stock in the aggregate amount of at least $13.9 million shall have traded on Nasdaq. Upon issuance of the purchase notice evidencing the ELOC Advance (defined below), we initially estimated the obligation to issue common stock at approximately $0.2 million. As of March 31, 2023, we had not issued any of our common stock in relation to the Letter Agreement Shares, leaving an estimated 200,715 shares to be issued, representing an obligation with a fair value of $0.3 million.

During January 2023, Ionic advanced $1.0 million dollars (the “ELOC Advance”) to us pursuant to the ELOC Agreement, as amended. Upon issuance of the purchase notice evidencing the ELOC Advance, we initially estimated the obligation to issue common stock at approximately $1.3 million. As of March 31, 2023, we had not issued any of our common stock in relation to the First 2023 Debenture, leaving an estimated 1,068,376 shares to be issued, representing an obligation with a fair value of $1.5 million.

Accounting for the Debentures and the ELOC

Using the guidance in ASC Topic 480, Distinguishing Liabilities from Equity, we evaluated the 2022 Debenture Purchase Agreement and its associated 2022 Debenture, the 2023 Debenture Purchase Agreement and its associated First 2023 Debenture, and the ELOC Purchase Agreement and its associated Letter Agreement and ELOC Advance, and determined that all represented obligations that must or may be settled with a variable number of shares, the monetary value of which was based solely or predominantly on a fixed monetary amount known at inception. Using a Level 3 input, we estimated the number of shares of our common stock that we would have to issue for each obligation and multiplied the estimated number of shares by the closing market price of our common stock on the measurement date to determine the fair value of the obligation. We then recorded the amount of the initial obligation in excess of the purchase price as finance cost. We remeasure each obligation at every balance sheet date until all shares representing the obligation have been issued, with the change in the amount of the obligation being recorded as finance cost. The following table shows the changes in our obligations to issue common stock (dollars in thousands):


	2022 Debenture		First 2023 Debenture		Letter Agreement		ELOC Advance		Total
Obligations to Issue Common Stock
Balance at December 31, 2022	$	1,892	$	—	$	—	$	—	$	1,892
Establishment of new obligation to issue shares	—		2,501		249		1,325		4,075
Issuance of Shares	(2,985)		—		—		—		(2,985)
Change in measurement of liability	1,279		558		26		139		2,002
Balance at March 31, 2023	$	186	$	3,059	$	275	$	1,464	$	4,984

Estimated Number of Shares Issuable
Balance at December 31, 2022	1,720,349		—		—		—		1,720,349
Change in estimated number of shares issuable	510,465		—		—		—		510,465
Establishment of new obligation to issue shares	—		2,232,590		200,715		1,068,376		3,501,681
Issuance of Shares	(2,094,428)		—		—		—		(2,094,428)
Balance at March 31, 2023	136,386		2,232,590		200,715		1,068,376		3,638,067


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The following table shows the composition of finance cost associated with our obligations to issue common stock (dollars in thousands):


	2022 Debenture		First 2023 Debenture		Letter Agreement		ELOC Advance		Total
Initial obligation in excess of purchase price	$	—	$	1,000	$	249	$	325	$	1,574
Change in measurement of liability	1,279		558		26		139		2,002
Total	$	1,279	$	1,558	$	275	$	464	$	3,576

NOTE 12. COMMITMENTS AND CONTINGENCIES

At ~~September 30, 2022,~~March 31, 2023, we had no material commitments outside the normal course of business.

Contingencies

As of ~~September 30, 2022,~~March 31, 2023, we were neither a defendant in any material pending legal proceeding nor are we aware of any material threatened claims against us and, therefore, we have not accrued any contingent liabilities.

Registration Rights Agreement

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

In connection with our entry into the Armistice Purchase Agreement, we also entered into a registration rights agreement with Armistice Capital, pursuant to which we ~~are~~were obligated to file one or more registration statements, as necessary, to register under the Securities Act of 1933, as amended, the resale of the shares we issued to Armistice Capital and the shares underlying the Armistice Warrants (collectively, the “Armistice Registrable Securities”) and to obtain effectiveness of such registration statement no later than 90 days following September 27, 2021. The registration ~~statement~~rights agreement provided that if we ~~filed~~failed to satisfy our obligation to timely obtain effectiveness, we would incur a penalty of as much as $1.0 million. The registration statement to register the resale of the Armistice Registrable Securities was declared effective on October 31, ~~2022 (the “Armistice Resale Registration Statement”). As of September 30, 2022, we~~2022. We had ~~already~~ accrued ~~a total of $1.0 million, equal to~~ the maximum ~~amount~~penalty and, as of liquidated damages we are required to pay under the Armistice Registration Rights Agreement for failing to satisfy our obligation to timely obtain effectiveness of the Armistice Resale Registration Statement. During the nine months ended September 30,December 31, 2022, we paid $0.2 million of ~~this~~such 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.~~three months ended March 31, 2023.


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NOTE 13. STOCKHOLDERS' EQUITY (DEFICIT)

Warrants

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


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

Outstanding at December 31, 2021		10,114,408	$	4.01	4.7	$	—
Outstanding at December 31, 2022								Outstanding at December 31, 2022	1,011,441	$	40.10	3.7	$	—
Granted	Granted	—	—					Granted	—	—
Exercised	Exercised	—	—					Exercised	—	—
Forfeited, cancelled or expired	Forfeited, cancelled or expired	—	—					Forfeited, cancelled or expired	—	—
Outstanding at September 30, 2022		10,114,408	$	4.01	3.9	$	—
Outstanding at March 31, 2023								Outstanding at March 31, 2023	1,011,441	$	40.10	3.4	$	—

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

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

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

Shares Weighted Average Exercise Price Per Share Weighted-Average Remaining Contractual Term Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2021 14,839,020 $ 3.30 6.1 $ 159
Granted 384,732 0.49
Exercised — —
Forfeited, cancelled or expired (100,000) 1.41
Outstanding at September 30, 2022 15,123,752 $ 3.25 5.4 $ —
Exercisable at December 31, 2021 12,776,520 3.62 5.7 $ 957
Exercisable at September 30, 2022 14,334,752 3.35 5.3 $ —


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




Outstanding at December 31, 2022	1,626,631	$	30.31	5.5	$	1
Granted	—	—
Exercised	—	—
Forfeited, cancelled or expired	(285)	12.50
Outstanding at March 31, 2023	1,626,346	$	30.31	5.2	$	12

Exercisable at December 31, 2022	1,549,681	31.41		5.3	$	1
Exercisable at March 31, 2023	1,589,946	30.96		5.1	$	6


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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)
Outstanding at December 31, 2021 1,036,000 $ 3.97 5.4 $ 159
Forfeited, cancelled or expired (299,500) 4.69
Outstanding at September 30, 2022 736,500 $ 3.68 6.2 $ —
Exercisable at December 31, 2021 886,000 4.41 4.9 $ —
Exercisable at September 30, 2022 676,500 3.88 6.1 $ —


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




Outstanding at December 31, 2022	71,450	$	35.99	6.1	$	—
Granted	—	—
Exercised	—	—
Forfeited, cancelled or expired	—	—
Outstanding at March 31, 2023	71,450	$	35.99	5.9	$	—

Exercisable at December 31, 2022	68,450	36.97		6.1	$	—
Exercisable at March 31, 2023	71,450	35.99		5.9	$	—

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):


		Nine Months Ended September 30,		Year Ended December 31,			Three Months Ended March 31,		Year Ended December 31,
		2022		2021			2023		2022
Balance at beginning of period	Balance at beginning of period	$	439	$	679	Balance at beginning of period	$	32	$	439
Share-based compensation expense related to China Cash Bonuses	Share-based compensation expense related to China Cash Bonuses	(340)		(240)		Share-based compensation expense related to China Cash Bonuses	12		(407)
Balance at end of period	Balance at end of period	$	99	$	439	Balance at end of period	$	44	$	32

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.

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):


~~Table of Contents~~			22			~~Financial Statement Index~~


		Nine Months Ended September 30,				Three Months Ended March 31,
		2022		2021				2023		2022
Stock options	Stock options	$	1,525	$	3,823		Stock options	$	143	$	514
China Cash Bonuses	China Cash Bonuses	(340)		(326)			China Cash Bonuses	12		(85)
Total	Total	$	1,185	$	3,497		Total	$	155	$	429

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.


Table of Contents			24			Financial Statement Index

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


			~~September 30, 2022~~March 31, 2023
Unrecognized share-based compensation cost for non-vested awards (in thousands):
Stock options			~~597~~55
China Cash Bonuses			7—
Weighted-average years over which unrecognized share-based compensation expense will be recognized:
Stock options			~~0.3~~1.9
China Cash Bonuses			~~0.3~~0

NOTE 14. RELATED PARTY TRANSACTIONS

As of ~~September 30, 2022,~~March 31, 2023, we owed approximately ~~$0.9~~$1.2 million to members of management representing various operating expense payments made on our behalf. ~~Approximately $0.5 million was repaid in October 2022.~~

NOTE 15. CHINA BUSINESS PARTNER

We interact with an unrelated entity (the “China Business Partner”) in more than one capacity. Firstly, since 2020, we have been working with the China Business Partner to earn revenue by obtaining business from some of the largest companies in China. Secondly, our artificial intelligence business in the U.S. has ~~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 ~~six~~three months ended ~~September 30, 2022,~~March 31, 2023, we did not make ~~a material amount of~~any such purchases. In addition, a member of our senior leadership team maintains a role in the senior management structure of the China Business Partner.

As of December 31, 2021, $4.0 million remained outstanding of the amount we advanced to the China Business Partner pursuant to an agreement between the two entities. Under the executed agreement, we had an obligation to advance as much as an aggregate amount of $5.1 million over the loan term of five years, and 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 three months ended March 31, ~~2022, the China Business Partner repaid the advances in full.~~

~~During the three~~2023 and ~~nine months ended September 30,~~ 2022, we recognized approximately ~~$1.9~~$0.1 million and ~~$5.3~~$2.2 million, respectively, of revenue from the relationship with the China Business Partner. At ~~September 30,~~March 31, 2023 and December 31, 2022, ~~we had $3.0 million of~~in addition to the outstanding accounts receivable balances from the China Business ~~partner.~~Partner described in Note 5, we had outstanding accounts payable to the China Business Partner of $0.7 million and $0.7 million, respectively.


~~Table of Contents~~			23			~~Financial Statement Index~~

NOTE 16. SUBSEQUENT EVENTS

Ionic Transactions

On ~~October 6, 2022, we entered into a debenture purchase agreement (the “Debenture Purchase Agreement”) with Ionic Ventures, LLC (“Ionic”), pursuant to which~~May 4, 2023, we issued ~~a convertible subordinated debenture in the original principal amount of $2,778,000 (the “Debenture”)~~136,386 shares 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 (the “Trigger Date”) or upon the occurrence of certain trigger events, including, without limitation, the suspension from trading or the delistingin final settlement of our ~~common stock from Nasdaq~~obligation to issue shares under the 2022 Debenture and 200,715 shares in final settlement of our obligation to issue the ~~occurrence~~Letter Agreement Shares. On May 5, 2023, we issued 378,965 shares to Ionic in partial settlement of ~~any material adverse effect. In addition, if~~our obligation to issue shares related to 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.ELOC Advance.

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”), subjectFailure to ~~full ratchet anti-dilution protection in the event we issue certain equity securities at a price below the then Fixed Conversion Price.~~Maintain Continued Listing Standards

On ~~November 7, 2022,~~April 27, 2023, we ~~entered into an amendment to~~received a written notice from the ~~Debenture Purchase Agreement with Ionic,~~Nasdaq Listing Qualifications Department notifying us that, 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”)Nasdaq Listing Rule 5550(b)(3), 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~~maintain a minimum of $500,000 in net income from continuing operations in the ~~Debenture in cash in an amount equal to the then outstanding balance~~most recently completed fiscal year, or two of the ~~Debenture multiplied by 120%, subject, however, to~~last three fiscal years (the “Net Income Standard”). Since our 2022 Form 10-K reported net loss from continuing operations, and as of April 25, 2023, we did not meet the ~~provisions~~alternative continued listing standards (collectively, with the Net Income Standard, the “Continued Listing Standards”) under Nasdaq Listing Rule 5550(b) of a ~~subordination and intercreditor agreement between Ionic and Mudrick. The Debenture further provides that~~minimum stockholders' equity of $2.5 million or minimum market value of listed securities of $35 million, we ~~will not effect~~no longer comply with 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”).Continued Listing Standards.

~~Also, on October 6, 2022, we entered into a purchase agreement (the “ELOC Purchase Agreement”)~~In accordance with ~~Ionic, which provides that, upon the terms and subject to the conditions and limitations set forth therein,~~Nasdaq Listing Rule 5810(c)(2)(A), we have ~~the right~~45 calendar days, or until June 12, 2023, to ~~direct Ionic~~submit a plan 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.


~~Table of Contents~~			24			~~Financial Statement Index~~

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 demonstratedregain compliance with the ~~Bid Price Rule by evidencing a closing price~~Continued Listing Standards (the “Cure Period”). If the Nasdaq Listing Qualifications Department accepts our plan, they can grant us an extension 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,~~up to 180 calendar days from April 27, 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.

evidence


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~~We did~~compliance. If the Nasdaq Listing Qualifications Department does not ~~make~~accept our plan, we can appeal such decision to the ~~required repayment~~Nasdaq Hearings Panel.

Our common stock will continue to be listed and traded on Nasdaq during the Cure Period, subject to our compliance with the other continued listing requirements 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.Nasdaq.


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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 ~~September 30, 2022~~March 31, 2023 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 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 contractual arrangements between our WFOE and certain VIEs based in China to address challenges resulting from laws, policies and practices that may disfavor foreign-owned entities that operate within industries deemed sensitive by the Chinese government. We were the primary beneficiary of the VIEs because the contractual arrangements governing the relationship between the VIEs and our WFOE, which included an exclusive call option agreement, exclusive business cooperation agreement, a proxy agreement and an equity pledge agreement, enabled us to (i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive call option to purchase, at any time, all or part of the equity interests in and/or assets of the VIEs to the extent permitted by Chinese laws. Because we were the primary beneficiary of the VIEs, we consolidated the financial results of the VIEs in our consolidated financial statements in accordance with GAAP.


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

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

Holding Foreign Companies Accountable Act

The HFCA Act was enacted on December 18, 2020. The HFCA Act states that if the SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market in the United States. On 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. The Consolidated Appropriations Act, 2023, which was signed into law on December 29, 2022, amended the HFCA Act to reduce the number of consecutive non-inspection years required to trigger the trading prohibition under the HFCA Act from three years to two years.

On 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,~~


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Transfer of Cash or Assets

Dividend Distributions

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

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

AI Business

~~Through~~We generate revenue by using the proprietary data and AI software platform we developed ~~our Remark AI business in the U.S. and the KanKan AI business in the Asia-Pacific region generate revenue by delivering~~to deliver AI-based computer vision products, computing devices and software-as-a-service solutions for businesses in many industries. ~~In addition~~We continue to ~~the other work that we have ramped up, we continue partnering~~partner with top universities on research projects targeting algorithm, artificial neural network and computing architectures which we believe ~~keeps~~will keep us among the leaders in technology development. ~~Our research team continues to participate in various~~

The primary focus of our business is promoting and facilitating the safety of our customers and their customers through our Smart Safety Platform (the “SSP”). The SSP, having won numerous industry and government benchmark tests for accuracy and speed, is a leading software solution for using computer vision ~~competitions at which it wins~~to detect persons, objects and behavior in video feeds. Real-time alerts from the SSP allow operations staff to respond rapidly to prevent any events or ~~ranks near~~activities that can endanger public security or ~~at the top.~~workplace safety.

We ~~continue~~deploy the SSP to ~~market Remark AI’s innovative AI-based solutions~~integrate with each customer’s IT infrastructure, including, in many cases, cameras already in place at the customer’s location(s). When necessary, we also sell and deploy hardware to ~~customers~~create or supplement the customer’s monitoring capabilities. Such hardware includes, among other items, cameras, edge computing devices and/or our Smart Sentry units. The Smart Sentry is a large mobile camera unit with a telescoping mast on which a high-quality camera is mounted. Based upon customer needs, the camera may have either standard vision and/or thermal vision capability. The camera works in conjunction with an edge computing device that is also mounted to the ~~retail, urban life cycle~~unit. The Smart Sentry is an example of how we incorporate the SSP in modern IT architectural concepts, including edge computing and ~~workplace~~micro-service architectures. Edge computing, for example, allows the SSP to conduct expensive computing tasks at distributed locations without requiring large data transmission over the internet, thereby dramatically reducing costs while integrating numerous and ~~food safety markets. We have also begun to expand our AI-based safety solutions to railway customers in the transportation market.~~varied sensors at distributed locations.

~~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~~We customize and sell our innovative AI-based computer vision products and solutions, including the SSP, to customers in ~~injury,~~the retail, construction, public safety, workplace safety 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~~public sector markets. We have also developed versions 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 Smart Safety Platform (the “SSP”), a specialized version of the software platform we developed, 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.~~ 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 temperature that may require secondary screening. In addition to thermal scanning, we can customize our AI software embeddedapplication in the ~~rPad to perform additional safety~~transportation and ~~security functions including identifying persons for authorized entry.~~energy markets.

~~Other Businesses~~

Though our focus remains on our AI and data analytics solutions, which produce substantially all of our revenue, we will continue to operate the Bikini.com e-commerce business until such time as we can sell such business in the near future. We also have continued developing a metaverse that we believe can lead to opportunities in other verticals to which we can apply our AI expertise and develop new revenue streams for our investors.


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Overall Business Outlook

The innovative AI and data analytics solutions we ~~already~~ sell ~~will~~ continue to ~~serve as the backbone~~gain worldwide awareness and recognition through media exposure, comparative testing, product demonstrations and word of ~~our efforts~~mouth resulting from positive customer experiences. We intend to expand our business not only in the Asia-Pacific region, where we believe there still are fast-growth AI market opportunities for our solutions, but also in the United States and Europe, where we see a tremendous number of requests for AI products and solutions in the workplace and public safety markets. We 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~~However, the COVID-19 pandemic ~~will likely continue~~may also present challenges 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 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 toWe continue to pursue large business opportunities, but anticipating when, or if, we can close these opportunities is difficult. In addition, we may face a large number of well-known competitors which would make deploying our software solutions in the market segments we have ~~a material adverse impact on our business at least through the 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~~cause additional stress on our working capital resources.

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

Business Developments During ~~2022~~2023

~~The~~China’s response to the COVID-19 pandemic, ~~caused renewed~~known as the Zero-COVID policy, included lockdowns and/or other severe restrictions on business and daily life in China, which made it difficult for us to interact with our clients and ~~vendors. While~~vendors through at least December 2022. Such preventative measures have had lingering effects which made it difficult for us to complete many projects in China during the first quarter of 2023. Our customers are only slowly beginning to make the decisions to restart stalled projects or begin new ones. The majority of our completed work was related to a large telecommunications provider in China. We expect project completions in China to begin to accelerate towards the latter half of the second quarter and into the third quarter of 2023 as our customers begin to restart projects that were placed on hold during the Zero-COVID policy and initiate new projects that had been on the drawing board when the Zero-COVID policy preventative measures went into effect early 2022.

As we work with customers and partners in China to ramp up business again, we have been working diligently to advance our interests in several large public safety products in the U.S., while our U.K. team has continued to support our U.S. project acquisition efforts as well as develop revenue-generating projects in the U.K. Additionally, we have been developing certain opportunities in South America which could allow us to gain a foothold in that market. All of such efforts to establish ourselves in the U.S., South America and the U.K. have caused increases in various business development expenses, but we expect such efforts to lead to a diversification of our business outside of China and reduce the concentrations in our revenue and associated accounts receivable.


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The following table presents our revenue categories as a percentage of total consolidated revenue during the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
		2023		2022
AI-based products and services		87	%	97	%
Advertising and other		13	%	3	%

CRITICAL ACCOUNTING POLICIES

During the three months ended March 31, 2023, we made no material changes to our critical accounting policies as we disclosed them in Part II, Item 7 of our 2022 Form 10-K.

RESULTS OF OPERATIONS

The following tables summarize our operating results for the three months ended March 31, 2023, and the discussion following the table explains material changes in such operating results compared to the three months ended March 31, 2022.


(dollars in thousands)	Three Months Ended March 31,				Change
	2023		2022		Dollars		Percentage
Revenue, including amounts from China Business Partner	$	826	$	4,667	$	(3,841)	(82)	%

Cost of revenue	455		4,270		(3,815)		(89)	%
Sales and marketing	366		148		218		147	%
Technology and development	169		455		(286)		(63)	%
General and administrative	2,833		3,939		(1,106)		(28)	%
Depreciation and amortization	46		41		5		12	%

Interest expense	(1,544)		(2,186)		642		(29)	%
Finance cost related to obligations to issue common stock	(3,576)		—		(3,576)

Loss on investment	—		(19,056)		19,056		(100)	%
Other gain (loss), net	1		(1)		2		(200)	%

Net loss	(8,162)		(25,429)		17,267		(68)	%

Revenue and Cost of Revenue. During the three months ended March 31, 2023, we were unable to complete many projects in China due to the slow and methodical business and economic recovery efforts that are ongoing after China lifted most of its onerous COVID-19 related restrictions at the end of 2022, while in the same period of the prior year we were able to complete ~~several larger~~numerous projects, including projects associated with our work with an unrelated entity (our China Business Partner).

Cost of revenue during the ~~first half of 2022, primarily during~~three months ended March 31, 2023 decreased in conjunction with the first quarter, including construction projects obtained through our China Business Partner and projects related to school 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.U.S. revenue decreases described above.

Technology and development. During the three months ended March 31, 2023, we recorded a refundable tax credit of approximately $0.5 million we received from the government of the United Kingdom resulting from our research and


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

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

~~CRITICAL ACCOUNTING POLICIES~~

~~During the nine months ended 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 September 30, 2022, and the discussion following the table explains material changes in such operating results compared to the three and nine months ended 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) %


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(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 three and nine months ended September 30, 2022, we completed larger AI-related projects than in the comparable periods of the prior year, 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 biosafety business due to a 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~~tax year. During 2022, we ~~no longer needed certain third-party services after our acquisition, in an immaterial business combination, of our U.K. subsidiary. Additionally,~~did not receive the similar tax credit ~~from~~of approximately $0.6 million related to the ~~United Kingdom reduced the expense and share-based compensation expense decreased $0.4 million during the same period.~~


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2021 tax year until May 2022.

General and administrative. During the three ~~and nine~~ months ended ~~September 30, 2022, as a result of the ongoing lockdowns related to China’s Zero-COVID policy,~~March 31, 2023, 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. Additionally, we~~ experienced an increase of $0.8 million in legal and other professional fees primarily in connection with financings that were completed after the end of the quarter and the filing of amendments to registration statements, and increases of $0.7 million and $1.7 million, respectively, in certain business development expenses as we work to expand our client base. The increases were partially offset by a decrease of ~~$2.8~~approximately $0.7 million in certain expenses related to business development, including short-term work space rentals and ~~$1.8 million, respectively, in~~consulting. Our share-based compensation ~~expense. Also~~expense decreased by $0.3 million due to a large batch of stock options with a grant date of July 8, 2021 becoming fully expensed in January 2023, in comparison to having a full three months of expense recognition during the ~~nine~~three months ended ~~September 30, 2022, our payroll and benefits increased $0.7 million.~~March 31, 2022.

Interest expense. We executed the Original Mudrick Loan Agreements in December 2021, pursuant to which we obtained the Original Mudrick Loans in the aggregate principal amount of $30.0 million. ~~The Mudrick Loans bore interest at 16.5% through July~~During the three months ended March 31, 2022, ~~and, following an amendment, now bear interest at 18.5%. The Mudrick Loans were the primary cause of the increase~~we recorded in interest expense during the three and nine months ended 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 Mudrick Loans. Included as part of interest expense during the nine months ended September 30, 2022 was $2.2approximately $1.1 million of amortization of debt discount and debt issuance cost related to the Original Mudrick Loans, ~~as well as a $0.3 million~~but did not have any such amortization during the three months ended March 31, 2023 because the debt discount and debt issuance cost were fully amortized during 2022. Interest expense also decreased because significantly less debt principal was outstanding on the Original Mudrick Loans during the three months ended March 31, 2023 than during the same period of the prior year, even though the interest rate had increased from 16.5% to 20.5%. Partially offsetting the decreases in interest expense was the amendment and extension fee ~~related~~of approximately $0.8 million we recorded in relation to our entry on March 14, 2023 into the New Mudrick Loan Agreement described, along with the Original Mudrick Loan Agreements, in Note 10 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q.

Finance Cost Related to Obligations to Issue Common Stock. The finance cost during the three months ended March 31, 2023 resulted from the establishment and remeasurement of obligations to issue our common stock that we incurred in relation to our transactions with Ionic pursuant to the ~~First Amendment~~Debenture Purchase Agreement, the Letter Agreement and the ELOC Purchase Agreement, each of which is described in Note 11 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q, that we entered into on October 6, 2022, January 5, 2023 and October 6, 2022, respectively. We had no similar transaction during the ~~Mudrick Loan Agreements.~~three months ended March 31, 2022.

Gain (loss) on investment. On July 1, 2021, as the result of a business combination involving a U.S.-based venture, Sharecare, Inc. (“Legacy ~~Sharecare~~Sharecare”) and Falcon Capital Acquisition Corp., a special purpose acquisition company, the common stock of the surviving entity of such business combination (“New ~~Sharecare,~~Sharecare”) became listed on the Nasdaq Stock Market LLC and our equity in Legacy Sharecare converted into cash and shares of publicly traded common stock of New Sharecare. As a result of the common stock of New Sharecare being traded on a national securities exchange, we were able to remeasure our investment at fair value. Since July 1, 2021, the value of the New Sharecare stock ~~has~~steadily 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~~loss of $19.0 million during the three months ended ~~September 30,~~March 31, 2022. On July 11, 2022, we delivered our remaining 6,250,000 shares of New Sharecare to our lender at their request and, ~~the loss of $26.4 million~~as a result, we did not maintain investments during the ~~nine~~three 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~~March 31, ~~2021, we are no longer required to routinely remeasure them at fair value.~~

~~Other gain (loss).~~ Other loss during the nine months 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.2023.

LIQUIDITY AND CAPITAL RESOURCES

Overview

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, and in each fiscal year since our inception, we have incurred net losses which have resulted in a stockholders’ deficit of ~~$14.7~~$25.8 million as of ~~September 30, 2022.~~March 31, 2023. Additionally, our operations have historically used more cash than they have provided. Net cash used in operating activities was ~~$13.6~~$2.1 million during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. As of ~~September 30, 2022,~~March 31, 2023, our cash balance was $0.4 million.

Mudrick Loans

On December 3, 2021, we entered into the Original Mudrick Loan Agreements pursuant to which we incurred the Original Mudrick ~~extended credit to us consisting of term loans~~Loans in the aggregate principal amount of $30.0 million. The Original Mudrick Loans ~~as amended by~~initially bore interest at 16.5% per annum until the ~~First Amendment, bear~~original maturity date of July 31, 2022 and, following an amendment we entered into with Mudrick in August 2022, bore interest at 18.5% per annum. The amendment also extended the maturity date of the Original Mudrick Loans from July 31, 2022 to October 31, 2022. However, we did not make the required repayment of the Original Mudrick Loans by October 31, 2022, which constituted an event of default under the Original Mudrick Loans and triggered an increase in the interest rate under the Original Mudrick Loans to 20.5%.


Table of Contents			33

On March 14, 2023, we entered into the New Mudrick Loan Agreement pursuant to which all of the Original Mudrick Loans were cancelled in exchange for the New Mudrick Notes in the aggregate principal amount of approximately $16.3 million. The New Mudrick Notes bear interest at a rate of 20.5% per annum, ~~(originally 16.5% per annum),~~ which isshall be payable on the last business day of each ~~month.~~month commencing on May 31, 2023. The interest rate will increase by 2% and the principal amount outstanding under the New Mudrick Notes and any unpaid interest thereon may become immediately due and payable upon the occurrence of any event of default under the New Mudrick Loan Agreement. All amounts outstanding under the New Mudrick ~~Loans, as amended,~~Notes, including all accrued and unpaid interest, will be due and payable in full on October 31, ~~2022 (originally due on July 31, 2022).~~ 2023. See Note 10 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q for additional information regarding the New Mudrick Notes.

To secure the payment and performance of the obligations under the Original Mudrick Loan Agreements and the New Mudrick Loan Agreement, we, together with the Guarantors, have granted to TMI Trust Company, as the collateral agent for the benefit of Mudrick, a first priority lien on, and security interest in, all assets of Remark and the Guarantors, subject to certain customary exceptions. ~~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~~


~~Table of Contents~~			35

~~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 Original Mudrick Loan Agreements, we paid to Mudrick an upfront fee equal to 5.0% of the amount of the Original Mudrick Loans, which amount was netted against the drawdown of the Original Mudrick Loans. We recorded the upfront fee as a debt discount of $1.5 million, and recorded debt issuance cost totaling $1.1 million. We amortized the discount on the Original Mudrick Loans and the debt issuance cost over the life of the Original Mudrick Loans and, during the ~~nine months~~year ended ~~September 30,~~December 31, 2022, we amortized $2.2 million of such discount and debt issuance cost.

~~On August 3, 2022,~~ In consideration for the amendment 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,~~in August 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 paypaid Mudrick an amendment and extension ~~payment~~fee in the amount of 2.0% of the then unpaid principal balance of the ~~loans outstanding as of the date of the First Amendment, or~~Original Mudrick Loans, which was approximately $0.3 million, ~~which was added~~by adding such amount to the principal balance of the ~~loans as of the effective date of the First Amendment.~~Original Mudrick Loans.

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.

Ionic Transactions

On October 6, 2022, we entered into the 2022 Debenture Purchase Agreement with Ionic, pursuant to which we issued the 2022 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.~~$2.5 million.

~~Also,~~In connection with the 2022 Debenture, on October 6, 2022, we also 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 aggregate of ~~$50,000,000~~$50.0 million of shares of our common stock over the 36-month term of the ELOC Purchase Agreement. Under the ELOC Purchase Agreement, after the satisfaction of certain commencement conditions, including, without limitation, the effectiveness of 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~~purchase notice directing Ionic to purchase any amount up to ~~$3,000,000~~$3.0 million of our common stock per trading day, at the ~~Purchase Price~~purchase price equal to 90% (or 80% if our common stock is not then trading on Nasdaq) of the average of the 5five lowest VWAPs of our common stock over a specified measurement period. With each purchase under the ELOC Purchase Agreement, we are required to deliver to Ionic an additional number of shares equal to 2.5% of the number of shares of common stock deliverable upon such purchase. ~~See~~

~~Note 16~~

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

On January 5, 2023, we and Ionic entered the Letter Agreement which amended the ELOC Purchase Agreement.

Under the Letter Agreement, the parties agreed, among other things, to (i) amend the floor price below which Ionic will not be required to buy any shares of our common stock under the ELOC Purchase Agreement from $0.25 to $0.20, determined on a post-reverse split basis, (ii) amend the per share purchase price for purchases under the ELOC Purchase Agreement to 90% of the average of the two lowest daily VWAPs over a specified measurement period, which will commence at the conclusion of the applicable measurement period related to the 2022 Debenture and (iii) waive certain requirements in the ELOC Purchase Agreement to allow for a one-time $0.5 million purchase under the ELOC Purchase Agreement.


Table of Contents			3634

On March 14, 2023, we entered into the 2023 Debenture Purchase Agreement with Ionic pursuant to which we authorized the issuance and sale of two convertible subordinated debentures in the aggregate principal amount of approximately $2.8 million for an aggregate purchase price of $2.5 million. The first debenture is in the original principal amount of approximately $1.7 million for a purchase price of $1.5 million, which was issued on March 14, 2023, and the second debenture is in the original principal amount of approximately $1.1 million for a purchase price of $1.0 million.

See Note 11 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q for additional detail on the Ionic transactions.

General

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

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

•develop and grow new product line(s)

•obtain additional capital through equity issuances.

Cash Flows - Operating Activities

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, we used ~~$3.5~~$6.6 million ~~more~~less cash in operating activities than we did during the same period of the prior year. The ~~increase~~decrease in cash used in operating activities is primarily the result of the timing of payments related to elements of working capital.

Cash Flows - Investing Activities

Investing activities during the ~~nine~~three months ended ~~September 30,~~March 31, 2023 were de minimis, while the same period during 2022 provided ~~$6.3~~$1.8 million in proceeds from the sale of a portion of our marketable ~~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.~~securities.


Table of Contents			3735

Cash Flows - Financing Activities

During the three months ended March 31, 2023, we received $1.5 million from the issuance of a convertible debenture and advances totaling $1.0 million under the ELOC Purchase Agreement, while the prior year period’s financing activity included $3.7 million repayments of debt.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

Please refer to Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements included in this report for a discussion regarding recently issued accounting pronouncements which may affect us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under Exchange Act, as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that, because of the material weaknesses in our internal control over financial reporting related to: (i) insufficient documentary evidence that we had reviewed information underlying manual journal entries at a sufficient level of detail, (ii) insufficient documentation of our consideration of appropriate revenue recognition criteria for certain contracts arising from our AI business in China, (iii) an aggregation of deficiencies in our monitoring and activity-level controls related to processes in our AI business in China including accounts payable, accrued liabilities, payroll and fixed assets, and (iv) failure to retain documentary evidence of all inventory purchases and the insufficient evaluation of the impact of discounted sales transactions on the valuation of our inventory, all of which we described in our ~~2021~~2022 Form 10-K, our disclosure controls and procedures were not effective at a reasonable assurance level as of ~~September 30, 2022.~~March 31, 2023.

Changes in Internal Control over Financial Reporting

In our ~~2021~~2022 Form 10-K, we disclosed that management had determined that material weaknesses in our internal control over financial reporting (described above) existed. As of the date of this report, the implementation of the plan developed by management to remediate the underlying causes of the material weaknesses and improve the design and operating effectiveness of internal control over financial reporting and our disclosure controls continues. Such implementation has been slowed by various factors, including the COVID-19 pandemic. As a result, there was no change in our internal control over financial reporting during such period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Table of Contents			36

PART II

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS


~~Table of Contents~~			38

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~~2022 Form 10-K, which could materially affect our business, financial condition or operating results. The risks described below and in our ~~2021~~2022 Form 10-K are not the only risks we face. Additional risks and uncertainties that we are unaware of may become important factors that affect us. If any of these risks actually occur, our business, financial condition or operating results may suffer, the trading price of our common stock could decline, and you may lose all or part of your investment.

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

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

On ~~September 2, 2022,~~March 14, 2023, we issued ~~1,250,000 shares~~a convertible subordinated debenture in the original principal amount of ~~our common stock~~$1,667,000 to Ionic Ventures, LLC in a private placement for a purchase price of $1,500,000.

We made the offer and sale of securities in the above-described private placement in reliance upon an exemption from registration requirements pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended, based upon representations made to us by the investor in a purchase agreement we entered into with ~~a fair value of $0.5 million to a vendor in exchange for services performed.~~the investor.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION ~~INFORMATION~~

None.


Table of Contents			3937			Financial Statement Index

ITEM 6. EXHIBITS

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.
32
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).

Incorporated Herein
By Reference To

Exhibit Number

Description

Document

Filed On

Exhibit Number

4.1

Form of Subordinated Convertible Debenture, dated as of March 14, 2023, by and between Remark Holdings, Inc. and Ionic Ventures, LLC.

8-K

03/16/2023

4.1

10.1

Letter Agreement, dated as of January 5, 2023, by and between Remark Holdings, Inc. and Ionic Ventures, LLC.

8-K

01/11/2023

10.1

10.2

Debenture Purchase Agreement, dated as of March 14, 2023, by and between Remark Holdings, Inc. and Ionic Ventures, LLC.

8-K

03/16/2023

10.1

10.3

Registration Rights Agreement, dated as of March 14, 2023, by and between Remark Holdings, Inc. and Ionic Ventures, LLC.

8-K

03/16/2023

10.2

10.4

Note Purchase Agreement, dated as of March 14, 2023, by and among Remark Holdings, Inc., certain of its subsidiaries party thereto, and Mudrick Capital Management, LP.

8-K

03/16/2023

10.3

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, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022; (ii) Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022; (iii) Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2023 and 2022; (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022; 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, 2023, formatted in Inline XBRL (included as Exhibit 101).


Table of Contents			4038

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:

~~November 14, 2022~~May 22, 2023

By:

/s/ Kai-Shing Tao

Kai-Shing Tao

Chairman and Chief Executive Officer

(principal executive, financial and accounting officer)


Table of Contents			4139


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	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3836
Item 4.	Controls and Procedures	3836

PART II
Item 1.	Legal Proceedings	3837
Item 1A.	Risk Factors	3837
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3937
Item 3.	Defaults Upon Senior Securities	3937
Item 4.	Mine Safety Disclosures	3937
Item 5.	Other Information	3937
Item 6.	Exhibits	4038
	Signature	4139


	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	105,157,769	$	105	$	365,263	$	(692)	$	(370,998)	(6,322)
Net loss	—	—		—		—		(8,924)		(8,924)
Share-based compensation	—	—		501		—		—		501

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

Foreign currency translation	—	—		—		(445)		—		(445)
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	99,918,941	$	100	$	352,394	$	(171)	$	(367,534)	$	(15,211)
Net income	—	—		—		—		72,746		72,746
Share-based compensation	—	—		3,798		—		—		3,798
Common stock and stock warrants issued for cash	4,237,290	4		4,610		—		—		4,614
Equity instrument exercises	85,000	—		56		—		—		56
Common stock issuance upon note payable conversion	876,493	1		1,104		—		—		1,105
Reclassification of warrant liability to equity	—	—		1,602		—		—		1,602
Foreign currency translation	—	—		—		(9)		—		(9)
Other	(9,000)	—		—		—		—		—
Balance at September 30, 2021	105,108,724	$	105	$	363,564	$	(180)	$	(294,788)	$	68,701

	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
Balance at December 31, 2021	105,157,769	$	105	$	364,239	$	(270)	$	(333,040)	$	31,034
Net loss	—	—		—		—		(46,882)		(46,882)
Share-based compensation	—	—		1,525		—		—		1,525

Common stock issued for services	1,250,000	1		499		—		—		500
Equity instrument exercises	—	—		—		—		—		—
Foreign currency translation	—	—		—		(867)		—		(867)
Balance at September 30, 2022	106,407,769	$	106	$	366,263	$	(1,137)	$	(379,922)	$	(14,690)

	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
Balance at December 31, 2020	99,505,041	$	100	$	351,546	$	(226)	$	(360,512)	$	(9,092)
Net income	—	—		—		—		65,724		65,724
Share-based compensation	—	—		3,823		—		—		3,823
Common stock and stock warrants issued for cash	4,237,290	4		4,610		—		—		4,614
Equity instrument exercises	498,900	—		879		—		—		879
Common stock issuance upon note payable conversion	876,493	1		1,104		—		—		1,105
Reclassification of warrant liability to equity	—	—		1,602		—		—		1,602
Foreign currency translation	—	—		—		46		—		46
Other	(9,000)	—		—		—		—		—
Balance at September 30, 2021	105,108,724	$	105	$	363,564	$	(180)	$	(294,788)	$	68,701


	2022	2021
Exchange rates at September 30th:
GBP:USD	1.113	—
RMB:USD	0.141	0.155
HKD:USD	0.127	0.129

Average exchange rate during the nine months ended September 30th:
RMB:USD	0.152	0.156
GBP:USD	1.259	—




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