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Delayed Nasdaq  -  04:00 2022-10-06 pm EDT
0.3027 USD   -2.45%
09/19Remark Holdings, Inc.(NasdaqCM:MARK) dropped from S&P Global BMI Index
09/06Remark Holdings, Inc. : Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing, Financial Statements and Exhibits (form 8-K)
08/15Remark : Announces Fiscal Second Quarter 2022 Financial Results - Form 8-K
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05/16/2022 | 05:07pm EDT
You should read our discussion and analysis of our financial condition and
results of operations for the three months ended March 31, 2022 in conjunction
with our 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.


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


Corporate Structure

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

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

The agreements governing the VIE contractual arrangements have not been tested
in a court of law. However, an article published in China Business Law Journal
indicated that a China International Economic and Trade Arbitration Commission
Shanghai tribunal ruled in 2010 and 2011 in two related cases involving the
contractual arrangement of an online game operating company that the contractual
arrangement was void on the grounds that such arrangement violated the mandatory
administrative regulations prohibiting foreign investors from investing in the
online game operation business and constituted "concealing illegal intentions
with a lawful form." According to publicly available information, while the
agreements entered into by the parties in the aforementioned CIETAC cases are
typical VIE agreements, the PRC domestic company involved in such cases was
mainly engaged in online game operation. Although the PRC foreign investment
regime restricts or prohibits foreign investment in certain industries, online
game operation is one of few industries where there are rules specifically
prohibiting foreign investors from controlling and participating in the business
indirectly through contractual or technical support arrangements. Though the
agreements in the CIETAC cases are similar to our contractual arrangements with
the VIEs, we and the VIEs do not operate in the online game operation industry
and, to our knowledge, the business conducted by the VIEs is not prohibited from
investment from foreign investors in China. We also note that the rulings in the
CIETAC cases are not binding on Chinese courts or other arbitration tribunals.

The following diagram illustrates our corporate structure, including our
significant subsidiaries, and the relationship between our WFOE and the VIEs as
of the date of this Form 10-Q. The diagram omits certain entities which are
immaterial to our results of operations and financial condition. Equity
interests depicted in this diagram are 100% owned. The relationships between
each of Chengdu Remark Technology Co., Ltd., Hangzhou Shufeng Technology Co.,
Ltd., Remark Data Technology Co., Ltd. and Bonet (Beijing) Technology LLC, which
constitute the VIEs, on the one hand, and KanKan Technology
                 Table of Contents      28      Financial Statement Index


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

                    [[Image Removed: mark-20220331_g2.jpg]]

Because we do not directly hold equity interests in the VIEs, we are subject to
risks and uncertainties of the interpretations and applications of Chinese laws
and regulations, including but not limited to, the validity and enforcement of
the contractual arrangements among the WFOE, the VIEs and the shareholders of
the VIEs. We are also subject to the risks and uncertainties about any future
actions of the Chinese government in this regard that could disallow the VIE
structure, which would likely
                 Table of Contents      29      Financial Statement Index


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

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

Risks of Doing Business in China

We are subject to certain legal and operational risks associated with having a
significant portion of our operations in China. Chinese laws and regulations
governing our current business operations, including the enforcement of such
laws and regulations, are sometimes vague and uncertain and can change quickly
with little advance notice. The Chinese government may intervene or influence
our operations and the operations of the VIEs at any time and may exert more
control over offerings conducted overseas and/or foreign investment in
China-based issuers, which could result in a material change in our operations
and/or the value of our securities. In addition, any actions by the Chinese
government to exert more oversight and control over offerings that are conducted
overseas and/or foreign investment in China-based issuers could significant
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. Recently, 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, data
security and anti-monopoly concerns. As of the date of this Form 10-Q, neither
we nor the VIEs have been involved in any investigations on cybersecurity review
initiated by any Chinese regulatory authority, nor has any of them received any
inquiry, notice or sanction. As of the date of this Form 10-Q, no relevant laws
or regulations in China explicitly require us to seek approval from the CSRC for
any securities listing. As of the date of this Form 10-Q, neither we nor the
VIEs have 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 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 10-Q, we and the VIEs are not required to seek
permissions from the CSRC, the CAC, or any other entity that is required to
approve of the operations of the VIEs. Nevertheless, Chinese regulatory
authorities may in the future promulgate laws, regulations or implement rules
that require us, our subsidiaries or the VIEs to obtain permissions from such
regulatory authorities to approve the operations of the VIEs or any securities

Transfer of Cash or Assets

Dividend Distributions

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

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
                 Table of Contents      30      Financial Statement Index


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

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

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

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

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

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

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

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

AI Business

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

                 Table of Contents      31      Financial Statement Index


We continue to market Remark AI's innovative AI-based solutions to customers in
the retail, urban life cycle and workplace and food safety markets. We have also
begun to expand our AI-based safety solutions to railway customers in the
transportation market.

Retail Solutions. Utilizing a client's existing cameras and IoT devices placed
throughout the store, Remark AI's retail solutions swiftly analyze real-time
customer shopping behavior, such as time of store entry and shelf-browsing
habits, and provide managers with a customer heatmap that reflects traffic
patterns. Purchase history is also analyzed, leading to relevant offers for
future purchase conversions, and customers for their continued loyalty through a
special VIP status that brings customized promotions and coupons along with
attentive customer service. Remark AI's retail solutions allow retailers and
store managers to make better data-driven decisions regarding store layout, item
placement, and pricing strategy, all while anonymizing customers' identities to
protect their privacy.

Urban Life Cycle Solutions. We offer and have installed several solutions in
what we call the urban life cycle category. Our urban life cycle solutions
include our AI community system which assists in building "smart" communities by
enhancing community security and safety. We also have AI solutions that help to
make schools "smart" by (i) providing an accurate and convenient method for
student check-in and check-out, (ii) providing an autonomous method of campus
monitoring that enhances students' safety by, for example, monitoring students
for elevated body temperatures that could indicate viral infections such as
influenza or COVID-19, detecting trespassers, detecting dangerous behaviors or
physical accidents that could result in injury, and (iii) monitoring the school
kitchen for safety violations.

In traffic management, our solutions assist in monitoring traffic for various
violations by automatically detecting, capturing, and obtaining evidence
regarding violations such as speeding, running red lights, driving against the
flow of traffic and even using counterfeit registration plates. Additionally,
our solutions provide constant road-condition monitoring, providing control
centers with real-time information on traffic conditions such as areas of
congestion or other traffic anomalies.

Workplace and Food Safety Solutions. The monitoring and detection capabilities
of our solutions ensure that workers are practicing established food safety
protocols, wearing the proper personal protective equipment, and complying with
local health codes. From commercial kitchens to factories to construction work
zones, our safety-compliance algorithms manage regulatory functions, review
hygienic and equipment status while checking and alerting management regarding

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

Biosafety Solutions. With help from one of the VIEs, we 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

                 Table of Contents      32      Financial Statement Index


temperature that may require secondary screening. In addition to thermal scanning, we can customize our AI software embedded in the rPad to perform additional safety and security functions including identifying persons for authorized entry.

Other Businesses

Though our focus remains on our AI and data analytics solutions, which produce
substantially all of our revenue, we are also pursuing a refresh of our
Bikini.com e-commerce business as well as the development of a metaverse that we
believe will dovetail not only with the Bikini.com business, but also with other
verticals to which we can apply our AI expertise and develop new revenue streams
for our investors.

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

Overall Business Outlook

The innovative AI and data analytics solutions we and the VIEs already sell will
continue to serve as the backbone of our efforts to expand our business not only
in the Asia-Pacific region, where we believe there still are fast-growth AI
market opportunities for our solutions, but also in the United States and
Europe, where we see a tremendous number of requests for AI products and
solutions in the workplace and public safety markets. We continue to pursue
large business opportunities, but anticipating when, or if, we can close these
opportunities is difficult. Quickly deploying our software solutions in the
market segments we have identified, in which we may face a number of large,
well-known competitors, is also difficult.

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

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.

Business Developments During 2022

Despite the COVID-19 pandemic causing renewed lockdowns in China, which made it
difficult for us to interact with our clients and vendors during the first
quarter of 2022, we were able to complete several larger projects, including
construction projects obtained through our China Business Partner and projects
related to school campuses.

                 Table of Contents      33      Financial Statement Index


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

                                                   Three Months Ended March 


                                                                                2022      2021
       AI-based products and services                                           97  %     92  %
       Advertising and other                                                     3  %      8  %

                 Table of Contents      34      Financial Statement Index



During the three months ended March 31, 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.


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

(dollars in thousands)                  Three Months Ended March 31,                               Change
                                         2022                   2021                Dollars                 Percentage
Revenue, including $2.2 million
from China Business Partner        $        4,667          $     4,406          $        261                            6  %

Cost of revenue                             4,270                2,752                 1,518                           55  %
Sales and marketing                           148                1,001                  (853)                         (85) %

Technology and development                    455                1,550                (1,095)                         (71) %
General and administrative                  3,939                2,697                 1,242                           46  %
Depreciation and amortization                  41                   66                   (25)                         (38) %

Interest expense                           (2,186)                (235)               (1,951)                         830  %
Other income                                    -                    -                     -
Change in fair value of warrant
liability                                       -               (1,610)                1,610                         (100) %
Loss on investment                        (19,056)                   -               (19,056)

Other gain (loss)                              (1)                  44                   (45)                        (102) %

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

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

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

Note 13 in the Notes to Unaudited Condensed Consolidated Financial Statements).

Technology and development. Consulting fees decreased $0.6 million during the
three months ended March 31, 2022, because we no longer needed certain
third-party services after our acquisition, in an immaterial business
combination, of our United Kingdom subsidiary. Additionally, the three months
ended March 31, 2022 reflected a small decrease in our common
                 Table of Contents      35      Financial Statement Index


stock price while the same period of the prior year had a moderate increase in
our common stock price, a situation that caused a $0.3 million decrease in
share-based compensation expense related to our outstanding liability-classified
China Cash Bonuses. Stock price is an input to the model we use to estimate the
fair value of the China Cash Bonuses, and changes in stock price can cause large
fluctuations in our estimates of fair value

General and administrative. The increase in general and administrative expense
during the three months ended March 31, 2022 was primarily the result of a $0.5
million increase in share-based compensation resulting almost entirely from the
recognition of the stock option issuances made in July 2020 for which an
accounting grant date did not occur until July 2021. Also contributing to the
increase was a $0.3 million increase in payroll and benefits, and a $0.2 million
increase certain business development expenses as we work to expand our client

Interest expense. We executed a $30.0 million note payable in December 2021
which bears interest at 16.5%; such note payable was the primary cause of the
increase in interest expense during the three months ended March 31, 2022. The
same period of the prior year included significantly less debt principal
outstanding, with such principal bearing lower interest rates than on the note
payable we executed in December 2021.

Loss on investment in marketable securities. On July 1, 2021, as the result of a
business combination involving Legacy Sharecare and New Sharecare, our equity in
Legacy Sharecare converted into cash and shares of publicly traded common stock
of New Sharecare (see   Note 5   in the Notes to Unaudited Condensed
Consolidated Financial Statements). 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, resulting in the loss of $19.1 million.

Change in fair value of warrant liability. After reclassifying our warrants to
equity on August 31, 2021, we are no longer required to routinely remeasure them
at fair value, while the three months ending March 31, 2021 included such a



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

On December 3, 2021, we entered into the Mudrick Loan Agreements pursuant to
which we incurred the Mudrick Loans in the aggregate principal amount of
$30.0 million. The Mudrick Loans bear interest at 16.5% per annum, which shall
be payable on the last business day of each month commencing on December 31,
2021. All amounts outstanding under the Mudrick Loans, including all accrued and
unpaid interest, will be due and payable in full 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 was
netted against the drawdown of the Mudrick Loans and recorded as a discount of
$1.5 million, and recorded debt issuance cost totaling $1.1 million. We are
amortizing the discount on the Mudrick Loans and the debt issuance cost over the
life of the Mudrick Loans.

Since 2009, we have held an interest in Legacy Sharecare. On July 1, 2021,
Legacy Sharecare completed a business combination as a result of which 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 publicly-traded common stock of New
Sharecare. As part of the business combination, we signed a lock-up agreement
with New Sharecare, pursuant to which we have agreed not to, subject to certain
exceptions, transfer, assign or sell any of our New Sharecare common stock until
the earlier to occur of: (i) one year after the effective time of the business
combination, and (ii) subsequent to the effective time, if the closing price of
New Sharecare common stock equals or exceeds $12.00 per share (as
                              Table of Contents      36


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

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

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

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

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

•develop and grow new product line(s)

•monetize existing assets

•obtain additional capital through equity issuances.

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

Cash Flows - Operating Activities

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

Cash Flows - Investing Activities

Investing activities during the three months ended March 31, 2022 provided $1.8 million in proceeds from the sale of a portion of our marketable securities.

                              Table of Contents      37


Cash Flows - Financing Activities

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

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

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

                              Table of Contents      38


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