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
Commission File Number 001-33720
| State of Incorporation | IRS Employer Identification Number | |||||||||||||
Address, including zip code, of principal executive offices
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 | ||||||||||||
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 | ☐ | |||||||||||
| ☑ | 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, a total of 106,407,769 shares of our common stock were outstanding.
TABLE OF CONTENTS
| PART I | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The 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.
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 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Cash | $ | $ | |||||||||
| Trade accounts receivable, net | |||||||||||
| Inventory, net | |||||||||||
| Investment in marketable securities | |||||||||||
| Deferred cost of revenue | |||||||||||
| Prepaid expense and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease assets | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Advances from related parties | |||||||||||
| Accrued expense and other current liabilities | |||||||||||
| Contract liability | |||||||||||
Notes payable, net of unamortized discount and debt issuance cost of $ | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease liabilities, long-term | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ Equity (Deficit) | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in-capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity (deficit) | ( | ||||||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | |||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(dollars in thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Cost and expense | |||||||||||||||||||||||
| Cost of revenue (excluding depreciation and amortization) | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Technology and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Total cost and expense | |||||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Change in fair value of warrant liability | |||||||||||||||||||||||
| Gain (loss) on investment | ( | ( | |||||||||||||||||||||
| Gain on debt extinguishment | |||||||||||||||||||||||
| Other gain (loss), net | ( | ( | |||||||||||||||||||||
| Total other income (expense), net | ( | ( | |||||||||||||||||||||
| Loss before income taxes | ( | ( | |||||||||||||||||||||
| Provision for income taxes | ( | ||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
| Comprehensive income (loss) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Weighted-average shares outstanding, basic | |||||||||||||||||||||||
| Weighted-average shares outstanding, diluted | |||||||||||||||||||||||
| Net income (loss) per share, basic | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Net income (loss) per share, diluted | $ | ( | $ | $ | ( | $ | |||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands, except number of shares)
| Three Months Ended 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 | $ | $ | $ | ( | $ | ( | ( | ||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Common stock issued for services | — | — | |||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Balance at September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| 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 | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Common stock and stock warrants issued for cash | — | — | |||||||||||||||||||||||||||||||||
| Equity instrument exercises | — | — | — | ||||||||||||||||||||||||||||||||
| Common stock issuance upon note payable conversion | — | — | |||||||||||||||||||||||||||||||||
| Reclassification of warrant liability to equity | — | — | — | — | |||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other | ( | — | — | — | — | — | |||||||||||||||||||||||||||||
Balance at September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| 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 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Common stock issued for services | — | — | |||||||||||||||||||||||||||||||||
| Equity instrument exercises | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Balance at September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| 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 | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Common stock and stock warrants issued for cash | — | — | |||||||||||||||||||||||||||||||||
| Equity instrument exercises | — | — | — | ||||||||||||||||||||||||||||||||
| Common stock issuance upon note payable conversion | — | — | |||||||||||||||||||||||||||||||||
| Reclassification of warrant liability to equity | — | — | — | — | |||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | |||||||||||||||||||||||||||||||
| Other | ( | — | — | — | — | — | |||||||||||||||||||||||||||||
Balance at September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | ( | $ | ||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
Change in fair value of warrant liability | ( | ||||||||||
Depreciation, amortization and impairments | |||||||||||
Share-based compensation | |||||||||||
Amortization of debt issuance costs and discount | |||||||||||
| Finance fee | |||||||||||
| Stock issuance for services performed | |||||||||||
Loss on investment | ( | ||||||||||
| Gain on debt extinguishment | ( | ||||||||||
| Loss on disposal of long-lived assets | |||||||||||
| Financing cost of converting note payable to common stock | |||||||||||
| Provision for doubtful accounts | |||||||||||
Other | ( | ||||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | ( | ||||||||||
| Inventory | ( | ( | |||||||||
| Deferred cost of revenue | ( | ||||||||||
Prepaid expense and other assets | |||||||||||
Operating lease assets | |||||||||||
Accounts payable, accrued expense and other liabilities | |||||||||||
Contract liability | ( | ||||||||||
Operating lease liabilities | ( | ||||||||||
Net cash used in operating activities | ( | ( | |||||||||
Cash flows from investing activities: | |||||||||||
| Proceeds from sale of investment | |||||||||||
Purchases of property, equipment and software | ( | ( | |||||||||
| Payment of amounts capitalized to software in progress | ( | ||||||||||
Net cash provided by (used in) investing activities | |||||||||||
Cash flows from financing activities: | |||||||||||
Proceeds from issuance of common stock, net | |||||||||||
Proceeds from debt issuance | |||||||||||
| Advances from related parties | |||||||||||
| Repayments of advances from related parties | ( | ||||||||||
Repayments of debt | ( | ||||||||||
Net cash provided by (used in) financing activities | ( | ||||||||||
Net change in cash | ( | ||||||||||
Cash: | |||||||||||
Beginning of period | |||||||||||
End of period | $ | $ | |||||||||
Supplemental cash flow information: | |||||||||||
Cash paid for interest | $ | $ | |||||||||
Supplemental schedule of non-cash investing and financing activities: | |||||||||||
| Transfer of marketable securities to partially settle notes payable | $ | $ | |||||||||
| Finance fee | $ | $ | |||||||||
Issuance of common stock upon note payable conversion | $ | $ | |||||||||
| Reclassification of warrant liability to equity | $ | $ | |||||||||
| Reclassification of investment to marketable securities | $ | $ | |||||||||
| $ | $ | ||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
REMARK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
NOTE 1. ORGANIZATION AND BUSINESS
Organization and Business
Remark Holdings, Inc. and its subsidiaries (“Remark”, “we”, “us”, or “our”) 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 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.
We are subject to certain legal and operational risks associated with having a significant portion of our operations in China. Chinese laws and regulations governing our current business operations, including the enforcement of such laws and regulations, are sometimes vague and uncertain and can change quickly with little advance notice. The Chinese government may intervene in or influence the operations of our China-based subsidiaries at any time and may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our securities. In addition, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors and cause the value of such securities to
significantly decline or become worthless. In recent years, the Chinese government adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to the use of variable interest entities, cybersecurity, data security, export control and anti-monopoly concerns. As of the date of this Form 10-Q, we have neither been involved in any investigations on cybersecurity review initiated by any Chinese regulatory authority, nor received any inquiry, notice or sanction. As of the date of this Form 10-Q, no relevant laws or regulations in China explicitly require us to seek approval from the China Securities Regulatory Commission (“CSRC”) for any securities listing. As of the date of this Form 10-Q, we have not received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other Chinese governmental authorities relating to securities listings. However, since these statements and regulatory actions are newly published, official guidance and related implementation rules have not all been issued. It is highly uncertain what potential impact such modified or new laws and regulations will have on our ability to conduct our business, accept investments or list or maintain a listing on a U.S. or foreign exchange.
As of the date of this Form 10-Q, we are not required to seek permissions from the CSRC, the Cyberspace Administration of China (the “CAC”), or any other entity that is required to approve our operations in China. Nevertheless, Chinese regulatory authorities may in the future promulgate laws, regulations or implement rules that require us or our subsidiaries to obtain permissions from such regulatory authorities to approve our operations or any securities listing.
Holding Foreign Companies Accountable Act
The Holding Foreign Companies Accountable Act (the “HFCA Act”) was enacted on December 18, 2020. The HFCA Act states if the Securities and Exchange Commission (the “SEC”) determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the Public Company Accounting Oversight Board (the “PCAOB”) for three consecutive years beginning in 2021, the SEC shall prohibit such shares from being traded on a national securities exchange or in the over the counter trading market in the United States. On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two. On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction. On December 16, 2021, the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in China and in Hong Kong because of positions taken by Chinese and Hong Kong authorities in those jurisdictions. The PCAOB has made such determination as mandated under the HFCA Act. Pursuant to each annual determination by the PCAOB, the SEC will, on an annual basis, identify issuers that have used non-inspected audit firms and thus are at risk of such suspensions in the future.
On August 26, 2022, the CSRC, the Ministry of Finance of the PRC, and the PCAOB signed a Statement of Protocol (the “Protocol”), taking the first step toward opening access for the PCAOB to completely inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. Pursuant to the Protocol, the PCAOB shall have independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the SEC. However, uncertainties still exist as to compliance with the Protocol. Depending on the implementation of the Protocol, if the PCAOB continues to be prohibited from conducting complete inspections and investigations of PCAOB-registered public accounting firms in China, then China-based companies will be delisted pursuant to the HFCA Act despite the Protocol. Therefore, there is no assurance that the Protocol could give relief to China-based companies against the delisting risk from the application of the HFCA Act.
Our auditor, Weinberg & Company, an independent registered public accounting firm headquartered in the United States, is not subject to the determinations announced by the PCAOB on December 16, 2021. Our auditor is currently subject to PCAOB inspections and has been inspected by the PCAOB on a regular basis. However, if the PCAOB is unable to inspect the work papers of our accounting firm in the future, such lack of inspection could cause trading in our common stock to be prohibited under the HFCA Act, and as a result, an exchange may determine to delist our common stock. The delisting and the cessation of trading of our common stock, or the threat of our common stock being delisted and prohibited from being traded, may materially and adversely affect the value of your investment.
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 months ended September 30, 2022 were impacted by the effects of the COVID-19 pandemic. The response to the COVID-19 pandemic will likely continue to adversely affect our business and financial results, as could economic and geopolitical conditions in some international regions, and we do not yet know what will be the ultimate effects on our business. The COVID-19 pandemic caused a broad shift towards remote working arrangements for many businesses worldwide and injected uncertainty and delay into decision-making processes for such businesses. Varying degrees of preventative measures are still in place in China and other parts of the world, including city-wide lockdowns, travel restrictions, closures of non-essential businesses and other quarantine measures. In particular, the preventative measures in China as a result of the Chinese government’s “Zero-COVID” policy have significantly limited the operational capabilities of our China-based subsidiaries. Many cities across large swaths of China have recently been fully or partially locked down for weeks or even months, including economically significant regions such as Shanghai. Such lockdowns have had a material adverse impact on our business, including on the collection of our accounts receivable, and we expect them to continue to have a material adverse impact on our business until their imposition is ceased.
The full extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including resurgences and further spread of existing or new COVID-19 variants, the duration of any remaining preventative measures implemented by domestic and foreign governments, the impact on capital and financial markets and the related impact on the financial circumstances of our customers, all of which are highly uncertain and cannot be predicted. The pandemic-related situation continues to change rapidly, and additional impacts of which we are not currently aware may arise. We are closely monitoring worldwide developments and are continually assessing the potential impact on our business.
Going Concern
During the nine months ended September 30, 2022, and in each fiscal year since our inception, we have incurred operating losses which have resulted in a stockholders’ deficit of $14.7 million as of September 30, 2022. Additionally, our operations have historically used more cash than they have provided. Subsequent to September 30, 2022, we did not make the required repayment of the outstanding loans under the Mudrick Loan Agreements by October 31, 2022, the maturity date. This constitutes an event of default for which we have not received a waiver as of the date of this Form 10-Q. Net cash used in operating activities was $13.6 million during the nine months ended September 30, 2022. As of September 30, 2022, 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, 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2022, with the audited Consolidated Balance Sheet amounts as of December 31, 2021 presented for comparative purposes, and the related unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss, the Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Stockholders’ Deficit in accordance with the instructions for Form 10-Q. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP, though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.
Our results of operations and our cash flows as of the end of the interim periods reported herein do not necessarily indicate the results we may experience for the remainder of the year or for any other future period.
Management believes that we have included all adjustments (including those of a normal, recurring nature) considered necessary to fairly present our unaudited Condensed Consolidated Balance Sheet and our unaudited Condensed Consolidated
Statement of Stockholders’ Deficit, each as of September 30, 2022, as well as our unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss and Condensed Consolidated Statements of Cash Flows for all periods presented. You should read our unaudited condensed consolidated interim financial statements and footnotes in conjunction with our consolidated financial statements and footnotes included within the Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).
Consolidation
We include all of our subsidiaries in our condensed consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.
Use of Estimates
We prepare our consolidated financial statements in conformity with GAAP. While preparing our financial statements, we make estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and accompanying notes. Accordingly, actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, share-based compensation, deferred income taxes, and inventory reserve, among other items.
The impact of the COVID-19 pandemic continues to unfold. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.
Cash
Our cash consists of funds held in bank accounts.
We maintain cash balances in United States dollars (“USD”), 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 | ||||||||||
| Cash denominated in: | |||||||||||
| USD | $ | $ | |||||||||
| RMB | |||||||||||
| GBP | |||||||||||
| HKD | |||||||||||
| Total cash | $ | $ | |||||||||
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, we do not believe we have any significant concentrations of credit risk. Cash held by our non-U.S. subsidiaries is subject to foreign currency fluctuations against the USD, although such risk is somewhat mitigated because we transfer U.S. funds to China to fund local operations. If, however, the USD is devalued significantly against the RMB, our cost to further develop our business in China could exceed original estimates.
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price). When reporting the fair values of our financial instruments, we prioritize those fair value measurements into one of three levels based on the nature of the inputs, as follows:
Level 1: Valuations based on quoted prices in active markets for identical assets and liabilities;
Level 2: Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and observable market data for similar, but not identical instruments; and
Level 3: Valuations based on unobservable inputs, which are based upon the best available information when external market data is limited or unavailable.
The fair value hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. For some products or in certain market conditions, observable inputs may not be available.
We believe the reported carrying amounts for cash, marketable securities, receivables, prepaids and other current assets, accounts payable, accrued expense and other current liabilities, and short-term debt approximate their fair values because of the short-term nature of these financial instruments.
Foreign Currency Translation
We report all currency amounts in USD. Our overseas subsidiaries, however, maintain their books and records in their functional currencies, which are GBP in the United Kingdom (“U.K.”) and RMB in China.
In general, when consolidating our subsidiaries with non-USD functional currencies, we translate the amounts of assets and liabilities into USD using the exchange rate on the balance sheet date, and the amounts of revenue and expense are translated at the average exchange rate prevailing during the period. The gains and losses resulting from translation of financial statement amounts into USD are recorded as a separate component of accumulated other comprehensive loss within stockholders’ deficit.
We used the exchange rates in the following table to translate amounts denominated in non-USD currencies as of and for the periods noted:
| 2022 | 2021 | ||||||||||
Exchange rates at September 30th: | |||||||||||
| GBP:USD | |||||||||||
| RMB:USD | |||||||||||
| HKD:USD | |||||||||||
Average exchange rate during the nine months ended September 30th: | |||||||||||
| RMB:USD | |||||||||||
| GBP:USD | |||||||||||
Revenue Recognition
AI-Based Products
We generate revenue by developing AI-based products, including fully-integrated AI solutions which combine our proprietary technology with third-party hardware and software products to meet end-user specifications. Under one type of contract for our AI-based products, we provide a single, continuous service to clients who control the assets as we create them. Accordingly, we recognize the revenue over the period of time during which we provide the service. Under another type of contract, we have performance obligations to provide fully-integrated AI solutions to our customer and we recognize revenue at the point in time when each performance obligation is completed and delivered to, tested by and accepted by our customer.
We recognize revenue when we transfer control of the promised goods or services to our customers, and we recognize an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. If there is uncertainty related to the timing of collections from our customer, which may be the case if our customer is not the ultimate end user of our goods, we consider this to be uncertainty of the customer’s ability and intention to pay us when consideration is due. Accordingly, we recognize revenue only when we have transferred control of the goods or services and collectability of consideration from the customer is probable.
When customers pay us prior to when we satisfy our obligation to transfer control of promised goods or services, we record the amount that reflects the consideration to which we expect to be entitled as a contract liability until such time as we satisfy our performance obligation.
For contracts under which we have not yet completed the performance obligation, deferred costs are recorded for any amounts incurred in advance of the performance obligation.
For our contracts with customers, we generally extend short-term credit policies to our customers, typically up to one year for large-scale projects.
We record the incremental costs of obtaining contracts as an expense when incurred.
We offer extended warranties on our products for periods of to three years . Revenue from these extended warranties is recognized on a straight-line basis over the warranty contract term.
Other
We generate revenue from other sources, such as from advertising and marketing services or e-commerce activity in which we sell goods to our customers. We recognize the revenue from these contracts at the point in time when we transfer control of
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, 2022 and 2021, there were no reconciling items related to the numerators of the net income (loss) per share calculations. The following table presents a reconciliation of the denominator of the basic net income (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 | |||||||||||||||||||||||
| Incremental shares resulting from assumed exercises of in-the-money stock options | |||||||||||||||||||||||
| Weighted-average shares outstanding, diluted | |||||||||||||||||||||||
Securities which may have affected the calculation of diluted earnings per share for the three and nine months ended September 30, 2022 if their effect had been dilutive include 15,123,752 outstanding stock options and 10,114,408
Segments
Existing GAAP, which establishes a management approach to segment reporting, defines operating segments as components of an entity about which separate, discrete financial information is available for evaluation by the chief operating decision maker. We have identified our Chief Executive Officer as our chief operating decision maker, who reviews operating results to make decisions about allocating resources and assessing performance based upon only one operating segment.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments (Topic 326). The ASU requires entities to use a forward-looking approach based on current expected credit losses to estimate credit losses on certain types of financial instruments, including trade receivables, which may result in the earlier recognition of allowances for losses. With regard to our financial reporting, ASU 2016-13 will be effective beginning January 1, 2023, and early adoption is permitted. We do not believe the impact of the ASU will be material to our financial position, results of operations and cash flows.
We have reviewed all accounting pronouncements recently issued by the FASB and the SEC. The authoritative pronouncements that we have already adopted did not have a material effect on our financial condition, results of operations, cash flows or reporting thereof, and except as otherwise noted above, we do not believe that any of the authoritative pronouncements that we have not yet adopted will have a material effect upon our financial condition, results of operations, cash flows or reporting thereof.
NOTE 3. CONCENTRATION OF RISK
Revenue and Accounts Receivable
The disaggregation of revenue tables in Note 4 demonstrate the concentration in our revenue from certain products and the geographic concentration of our business. We also have a concentration in the volume of business we transacted with customers, as during the nine months ended September 30, 2022, two of our customers represented about 55 % and 23 %, respectively, of our revenue, while during nine months ended September 30, 2021, our two largest customers represented about 32 % and 21 %, respectively, of our revenue. At September 30, 2022, accounts receivable from two of our customers represented about 32 % and 18 %, respectively, of our gross accounts receivable, while at December 31, 2021, accounts receivable from our three largest customers represented about 25 %, 24 % and 10 %, respectively, of our gross accounts receivable.
NOTE 4. REVENUE
We primarily sell AI-based products and services based upon computer vision and other technologies.
We do not include disclosures related to remaining performance obligations because substantially all our contracts with customers have an original expected duration of one year or less or, with regard to our stand-ready obligations, the amounts involved are not material.
Disaggregation of Revenue
The following table presents a disaggregation of our revenue by category of products and services (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
The following table presents a disaggregation of our revenue by country (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| China | $ | $ | $ | $ | |||||||||||||||||||
| United States | |||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
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 months ended September 30, 2022, our contract liability changed only as a result of routine business activity.
During the nine months ended September 30, 2022 and 2021, the amount of revenue we recognized that was included in the beginning balance of Contract liability was not
During the nine months ended September 30, 2022 and 2021, we did not
NOTE 5. TRADE ACCOUNTS RECEIVABLE
| September 30, 2022 | December 31, 2021 | ||||||||||
| Gross accounts receivable balance | $ | $ | |||||||||
| Allowance for bad debt | ( | ( | |||||||||
| Accounts receivable, net | $ | $ | |||||||||
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.
On July 2, 2022, we received a Notice of Trigger Event and Mandatory Payment from our senior lenders, which required that we make a prepayment of our senior secured loans (which are described in Note 11) by delivering to each lender shares of common stock of New Sharecare in the fair market amount applicable to each such lender to prepay our senior secured loans. On July 11, 2022, we delivered our remaining 6,250,000 shares of New Sharecare, which reduced the outstanding principal amount on our senior secured loans by approximately $9.7 million, and as a result, we no longer own any equity interests in New Sharecare as of such date.
The total net loss on investment during the 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 | ||||||||||
| $ | $ | ||||||||||
Other receivables | |||||||||||
Prepaid expense | |||||||||||
Deposits | |||||||||||
Other current assets | |||||||||||
Total | $ | $ | |||||||||
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 | |||||||||||||||
| Vehicles | $ | ||||||||||||||||
| Computers and equipment | $ | ||||||||||||||||
| Furniture and fixtures | |||||||||||||||||
| Software | |||||||||||||||||
| Leasehold improvements | |||||||||||||||||
| Software development in progress | |||||||||||||||||
| Total property, equipment and software | $ | $ | |||||||||||||||
| Less accumulated depreciation | ( | ( | |||||||||||||||
| Total property, equipment and software, net | $ | $ | |||||||||||||||
For the nine months ended September 30, 2022 and 2021, depreciation (and amortization of software) expense was $0.1 million and $0.2 million, respectively.
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 | $ | $ | $ | $ | |||||||||||||||||||
Short-term lease expense | |||||||||||||||||||||||
Lease expense | $ | $ | $ | $ | |||||||||||||||||||
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.
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 | $ | ||||
| Two years | |||||
| Total lease payments | $ | ||||
| Less: Imputed interest/present value discount | ( | ||||
| Present value of cash flows | $ | ||||
| Lease liabilities on balance sheet: | |||||
| $ | |||||
| Long-term | |||||
| Total lease liabilities | $ | ||||
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. 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 | ||||||||||
| Accrued compensation and benefit-related expense | $ | $ | |||||||||
| Accrued interest | |||||||||||
| Other accrued expense | |||||||||||
| Other payables | |||||||||||
| Operating lease liability - current | |||||||||||
| Other current liabilities | |||||||||||
Total | $ | $ | |||||||||
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 | $ | $ | |||||||||
| Unamortized discount and debt issuance cost | ( | ||||||||||
| Notes payable, net of unamortized discount and debt issuance cost | $ | $ | |||||||||
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 Loans”). The Mudrick Loans, as amended, bear interest at 18.5 % per annum (originally 16.5 % per annum), which is payable on the last business day of each month. All amounts outstanding under the Mudrick Loans, as amended, including all accrued and unpaid interest, will be due and payable in full on October 31, 2022 (originally due on July 31, 2022). To secure the payment and performance of the obligations under the Mudrick Loan Agreements, we, together with the Guarantors, have granted to TMI Trust Company, as the collateral agent for the benefit of Mudrick, a first priority lien on, and security interest in, all assets of Remark and the Guarantors, subject to certain customary exceptions. The Mudrick Loan Agreements contain representations, warranties, events of default, indemnifications and other provisions customary for financings of this type. The occurrence of any event of default under the Mudrick Loan Agreements may result in the principal amount outstanding and unpaid interest thereon becoming immediately due and payable.
In connection with our entry into the Mudrick Loan Agreements, we paid to Mudrick an upfront fee equal to 5.0 % of the amount of the Mudrick Loans, which amount was netted against the drawdown of the Mudrick Loans. 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 Mudrick Loans and the debt issuance cost over the life of the Mudrick Loans and, during the nine months ended September 30, 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 ended September 30, 2022, we repaid $6.2 million of principal and, as described in more detail in Note 6, we delivered all remaining shares of New Sharecare to Mudrick on July 11, 2022, in partial settlement of the Mudrick Loans, resulting in a reduction of approximately $9.7 million of principal.
NOTE 12. COMMITMENTS AND CONTINGENCIES
At September 30, 2022, we had no material commitments outside the normal course of business.
Contingencies
As of September 30, 2022, we were neither a defendant in any material pending legal proceeding nor are we aware of any material threatened claims against us and, therefore, we have not accrued any contingent liabilities.
Registration Rights Agreement
On September 27, 2021, we entered into a securities purchase agreement (the “Armistice Purchase Agreement”) with Armistice Capital Master Fund Ltd. (“Armistice Capital”) pursuant to which we issued shares of our common stock together with warrants to purchase our common stock, subject to certain customary anti-dilution adjustments (the “Armistice Warrants”).
In connection with our entry into the Armistice Purchase Agreement, we also entered into a registration rights agreement with Armistice Capital, pursuant to which we are obligated to file one or more registration statements, as necessary, to register under the Securities Act of 1933, as amended, the resale of the shares we issued to Armistice Capital and the shares underlying the Armistice Warrants (collectively, the “Armistice Registrable Securities”) and to obtain effectiveness of such registration statement no later than 90 days following September 27, 2021. The registration statement we filed to register the resale of the Armistice Registrable Securities was declared effective on October 31, 2022 (the “Armistice Resale Registration Statement”). As of September 30, 2022, we had already accrued a total of $1.0 million, equal to the maximum amount of liquidated damages we are 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, 2022, we paid $0.2 million of this amount, resulting in an unpaid amount of $0.8 million included in other accrued expense at September 30, 2022.
Bid Price Deficiency
On February 25, 2022, we received written notice from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, for a period of 30 consecutive business days, the bid price of our common stock closed below the minimum of $1.00 per share required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had 180 calendar days, or until August 24, 2022, to regain compliance with the Bid Price Rule.
On August 30, 2022, we received a staff determination letter from Nasdaq stating that we did not regain compliance with the Bid Price Rule and we were not eligible for a second 180-day grace period because we did not comply with the minimum $5,000,000 Stockholders’ Equity initial listing requirement for the Nasdaq Capital Market. We appealed Nasdaq’s delisting determination to a Hearings Panel (the “Panel”), which heard our presentation at a hearing held on October 6, 2022.
On October 17, 2022, we received a written decision from the Panel granting our request for continued listing on Nasdaq, subject to the conditions that, on January 11, 2023, we will have demonstrated compliance with the Bid Price Rule by evidencing a closing price of $1.00 or more per share for a minimum of 10 consecutive trading sessions, and that we provide prompt notification of any significant events that occur during the period ending on January 11, 2023 that may affect our compliance with Nasdaq rules.
NOTE 13. STOCKHOLDERS' EQUITY (DEFICIT)
Warrants
The following table summarizes information related to our equity-classified stock warrant issuances as of and for the dates and periods noted:
| Shares | Weighted Average Exercise Price Per Share | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
| Outstanding at December 31, 2021 | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | |||||||||||||||||||||||
| Forfeited, cancelled or expired | |||||||||||||||||||||||
| Outstanding at September 30, 2022 | $ | ||||||||||||||||||||||