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Edited Transcript of MARK earnings conference call or presentation 1-Apr-19 8:30pm GMT

Q4 2018 Remark Holdings Inc Earnings Call

Atlanta Apr 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Remark Holdings Inc earnings conference call or presentation Monday, April 1, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alison Davidson

Remark Holdings, Inc. - Interim CFO

* Kai-Shing Tao

Remark Holdings, Inc. - Chairman & CEO

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Conference Call Participants

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* Darren Paul Aftahi

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Remark Holdings' Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Keith, and I'll be your operator this afternoon.

Joining us for today's presentations are Remark Holdings' Chairman and CEO, Shing Tao; and Interim CFO, Alison Davidson. Following their remarks, we will open the call for questions from the company's institutional investors and analysts.

Some of the statements made today may be forward-looking statements. These statements involve risks and uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Any forward-looking statements reflect Remark Holdings' current views, and Remark Holdings expressly disclaims any obligation to update or revise any forward-looking statements after the date hereof. This disclaimer is only a summary of Remark Holdings' statutory forward-looking statements disclaimer, which is included in full in its filings with the SEC.

Also, please note the company uses financial measures not in accordance with generally accepted accounting principles, commonly known as GAAP, to monitor the financial performance and operations. Non-GAAP financial measures should be viewed in addition to, and not also as an alternative for, the reported financial results as determined in accordance with GAAP.

To support the company's view of adjusted EBITDA, later in this call, a reconciling table is provided at www.remarkholdings.com and a similar reconciling table will be included in the company's Form 10-Q filed with the SEC.

I will now turn the call over to Chairman and CEO, Shing Tao. Please go ahead.

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Kai-Shing Tao, Remark Holdings, Inc. - Chairman & CEO [2]

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Thank you, operator. Good afternoon, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the fourth quarter and full year ended December 31, 2018.

We are pleased with our fourth quarter top line performance of $22.3 million, which compares to $18.6 million in that year's fourth quarter. Our results exclude an additional $4.6 million from KanKan, which was delivered but revenue recognition has been deferred. Overall, our performance was in line with the preliminary revenues we announced in January. Both of our business segments closed the final quarter of the year on a strong note.

As we announced 2 weeks ago, we have entered into an agreement to sell Vegas.com to VDC-MGG Holdings, an affiliate of our senior lending group. This transaction favorably positions us to significantly reduce our debt, restructure our balance sheet and streamline our cost structure as we transform Remark into a pure AI-focused company. We will now dedicate all of our attention to strategically expanding our AI business globally.

To reflect this expansion globally and the breadth of our AI solutions to corporate businesses and governments, KanKan AI will be rebranded to Remark AI. This transformation puts us in a vastly improved position to secure strategic and financial partnerships with key players across multiple sectors spanning retail, manufacturing, agriculture, public safety and security. The Remark AI platform supports highly tailored yet easy-to-install AI solutions aimed at solving specific problems, reducing risk and delivering positive outcomes across multiple industries. As we make ongoing progress in deploying our products and scaling our business, we expect to build a stream of recurring revenues supported by modest recurring capital cost and operating leverage.

Although the sales cycles in the business-to-business and business-to-government are comparatively longer, the size and long time line of these contracts make it more than worthwhile and thus, so highly coveted. We are in the midst of a very strong pipeline of deals that are in testing, proof-of-concept stage and/or contract stage in retail, food, manufacturing, construction and agriculture, which we believe will support strong growth in 2019 and beyond.

Remark AI and retail. AI is now emerging as a vital component of the next stage of the mass market retail, supermarket and restaurant industries. We view McDonald's widely covered $300 million acquisition last week of the AI startup, Dynamic Yield, as somewhat of a bellwether for the industry. Major mass market brands that touch millions of consumers every day recognize the need to improve their ability to utilize data in a way that improves their personal connection to each consumer, creating more sales opportunities, driving conversion and increasing efficiencies. McDonald's CEO, Steve Easterbrook, said it best. We haven't begun to connect the technology together and get the various pieces talking to each other. How do you transition from mass marketing to mass personalization? To do that, you really got to unlock the data within that ecosystem in a way that's useful to a customer. This is precisely what our solutions are intended to do and in fact, what we are already doing in China with Lotus supermarkets.

Launched live in stores in Q3, Q4 of 2018, our AI retail solution is off to a solid start as we demonstrate the effectiveness of our technology in elevating engagement, driving transaction and fostering deeper connections with shoppers in large and flagship superstores. At these superstores, as much as 250,000 square feet in size, with tens of thousands of SKUs and thousands of daily visitors, Remark's AI solution has been utilized to significantly enhance the customer experience, increase customer traffic, improve membership conversion and spending per visit and, at the same time, reduce the cost of operation by eliminating human errors and driving employee productivity.

Building on our success to date, we are continuing to work closely with our client to further integrate our AI products deeper into their operations and expand into more superstores and convenience stores.

In addition, our AI solutions are being tested in various retail businesses, including fast food chains, mega shopping malls, autonomous stores and drugstores.

What do we provide for our customers? Our AI solution delivers: one, facial ID-based membership management; two, comprehensive member customer profiling; three, precision marketing campaigns; and four, smart product selection and e-personalized product recommendation; and finally, face ID payment. We augment data analysis to our data capture abilities across social media, mobile apps and CRM systems, among other channels, allowing us to provide store owners with a comprehensive targeting, marketing and analytical platform aimed at engaging consumers and driving higher-margin sales.

Beyond retail, we are also seeing strong momentum in the rollout of our AI safety/security initiative. The public safety and surveillance markets are a large opportunity, and we're continuing to work with our clients to develop solutions that will be used in construction sites, campuses, restaurants and traffic monitoring and enforcement.

Through our smart city and smart business solutions offering, we deliver 4 core products: One, facial ID. Ensuring a person's identity, which is ideal for airports, trains and customs checkpoints, financial institutions and facial payments. Two, access control. Through facial identification, combining with voice identification, it grants access only to the registered, which can be widely applied in places with restricted access control such as hospitals, schools, offices and communities. Three, behavioral analysis. This detects persons of interest and suspicious behavior in real time, and can be used in police investigation, event security and POA -- POI tracking, safety policy enforcement in restaurants, factories, construction sites and hospitals. Four, dynamic object recognition. This involves recognizing physical objects and their statuses in static images and video streams in real time. It has been largely used in traffic analysis, i.e., speeding, traffic violation, traffic jam prediction, et cetera; environmental protection analysis, i.e. dust, smoke; hazardous conditions, for example, toxic gas, liquid leaking, fire and smoke.

During the quarter, we continued to improve and utilize the suite of products to help schools, restaurants, construction sites and city governments to enforce safety and security policy. Through the course of 2019, we are excited to be in the running for a number of large projects, not just in Asia, but in the U.S. and in Europe.

Some examples of the deals we are currently in the middle of executing. We are in the midst of expanding our safety/security system to a large transportation company that will utilize Remark AI to help verify the identity of the drivers, to the passengers, to even wanted criminals.

Our food safety program has now commenced in Shanghai, and we are looking to continue to expand kitchen monitoring system to the city, throughout the city and others.

Our agricultural AI system as it relates to pig farming, looks to commence shortly to target the serious issue of biosafety, especially in the light of the African swine disease. With China being the largest consumer of pork and producers of pig of roughly 700 million a year, this is not only a strategic interest to the pork-producing companies but to China's overall strategic interest.

In the U.S., a shopping center company with over 70 locations that are looking to lower their $500,000 a year per location cost, to a fast food restaurant chain with over 2,000 restaurants across the U.S., personalizing their customer experience in the ways that McDonald's is trying to do with their acquisition of Dynamic Yield.

And lastly, a large European store with over 10,000 stores in Europe and U.S., and we are looking to do for them like we have done already for Lotus Supermarkets. We are expecting much more deployments to follow in 2019 and forward.

Looking to 2019 and beyond. We're focused on building on the success of our retail launch while continuing to work with our clients across the safety and security markets to standardize our products that apply to various applications. We remain very optimistic regarding the future of our AI business, especially as we transition into a pure-play provider.

Given the scope and diversity of the contracts we secured, the stature and the customers we're working with and our deployment efforts underway, we remain well positioned to build on our revenue growth in the months ahead.

In addition, we continue to believe there's a significant untapped value in our key digital media assets, principally a minority ownership stake in Sharecare.com. We believe the stake will be ultimately monetized to the benefit of our shareholders.

And now let me turn the call over to Alison for the financial review.

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Alison Davidson, Remark Holdings, Inc. - Interim CFO [3]

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Thank you, Shing, and good afternoon, everyone. Turning to our financial results for the fourth quarter ended December 31, 2018. Our revenue for the fourth quarter of 2018 was $22.3 million compared to $18.6 million last year. The increase was driven by a $4 million increase in revenues resulting from transaction growth in the Travel & Entertainment segment. Our Technology & Data Intelligence segment contributed $2.4 million revenue from the deployment of our AI-based retail and safety solutions, a further $4.6 million was delivered through our AI-based safety and risk management solution, but the revenue recognition will be deferred until such time as we collect the amounts due from the customer. We anticipate collections to begin in the second quarter of 2019.

Turning to our expenses. Our total cost and expense in the fourth quarter of 2018 was $32.4 million compared to $40 million last year, driven in part by a reduction in impairment charges to $2.2 million from $14.6 million in 2017, which included recognized losses of $5.8 million and $8.8 million on impairments of long-lived intangible assets and goodwill, respectively, which were acquired through the CBG acquisition. During the fourth quarter of 2018, we also recorded a $600,000 impairment of the remaining long-lived intangible assets acquired in the CBG acquisition and a $1.6 million impairment of goodwill for the sale of substantially all the remaining assets of Banks.com.

Our cost and expense for the fourth quarter of 2018 also included a $4.7 million increase in cost of revenue in the Technology & Data Intelligence segment to deliver on fourth quarter projects and a $1.5 million increase in paid-search costs in the Travel & Entertainment segment resulting from the competitive nature of the paid-search marketplace. Offsetting these increases was a $2 million decrease in employee stock compensation.

Our operating loss was $10.1 million for the fourth quarter of 2018 compared to an operating loss of $21.4 million in the fourth quarter of last year due to a reduction in total cost and expense.

Our net loss for the fourth quarter of 2018 was $7.1 million or negative $0.19 per diluted share compared to a net loss of $89.2 million or a negative $3.47 per diluted share in the fourth quarter of last year. The net loss for the fourth quarter of 2018 included a noncash gain of $5.7 million related to a change in the fair value of our warrant liability, which occurred due to decrease in our stock price during the period. The same period of 2017 included a noncash loss of $66.5 million related to a change in the fair value of our warrant liability, which resulted from an increase in our stock price during that period.

Additionally, we reclassified certain amounts in our December 31, 2017 consolidated statements of operations and comprehensive loss to conform to the current presentation as of December 31, 2018. Specifically, we have changed how we present operating expense to better reflect the activities that generate such expense. For comparability, we have provided a comparison of 2018 results to 2017 results by quarter at our website, www.remarkholdings.com. Neither stockholders' deficit as of December 31, 2017, nor net loss or cash flows for the year-ended December 31, 2017, changed because of the reclassification.

Now turning to our balance sheet. Our cash balance is $14.4 million with an additional $11.1 million of restricted cash, bringing our combined cash position to $25.5 million at quarter end. This compares to a combined cash position of $34.3 million at December 31, 2017. Cash decreased primarily due to an increase in total expense as we grow our operations in China and engaged in multiple proof-of-concept projects, the timing of payments related to elements of working capital and paying security deposits related to our Travel & Entertainment business.

On March 19, we announced our agreement to sell Vegas.com to VDC-MGG Holdings, LLC, an affiliate of our senior lending group, for an anticipated enterprise value of approximately $45 million. The cash proceeds of the transaction will be used to pay amounts due to our senior lenders, leaving only approximately $10 million of remaining debt owed to the senior lenders.

The transaction remains subject to certain closing conditions, including approval of the transaction by our stockholders. We will hold a special meeting of stockholders to obtain stockholder approval for the transaction. The closing of the transaction is expected to take place during the second quarter of 2019.

As part of our agreement to sell Vegas.com, our lenders have agreed to forbear from taking enforcement actions against us through up to June 4, 2019. Also, in connection with our agreement to sell Vegas.com, we are in discussions with our lenders regarding an amendment to the financing agreement anticipated to be entered into at the closing of the Vegas.com sale transaction.

I'll now turn the call over to the operator for the Q&A session. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Darren Aftahi with Roth Capital Partners.

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Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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First, can I just get clarity on the data intelligence? I understand you deferred $4.6 million of revenue collected in the second quarter. Can you help us understand on that $4.7 million on the cost of revenue for KanKan, what is actually in that number? Are there all the costs that are borne with that additional $4.6 million in revenue? And then, are there additional like POC costs where there's not revenue related to that yet?

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Alison Davidson, Remark Holdings, Inc. - Interim CFO [3]

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So everything that is included in the cost of revenue is related directly to a project -- related directly to a contract. And the -- what's included in cost of revenues does include the costs related to the $4.6 million of revenue that's been deferred into the second quarter.

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Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Okay, that's helpful. Shing, I think when you were at our conference, you had talked about strength across agriculture, smart city and retail. I guess with Q1 basically done and as we look at kind of the first half of the year, where are you most excited, kind of if you do duplicate it, I guess, one, in terms of the pipeline of verticals; and then, two, where you actually think you'll see real revenue materialize over the first 90 to 180 days of 2019?

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Kai-Shing Tao, Remark Holdings, Inc. - Chairman & CEO [5]

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Darren, just to clarify, what -- when you say real revenue, what you mean by that?

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Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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I mean, so the first part is where are you most excited about pipeline? And then the second would be where you actually will be recognizing revenue from those contracts? So it's more of a sort of a near-term and intermediate term kind of view.

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Kai-Shing Tao, Remark Holdings, Inc. - Chairman & CEO [7]

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Yes. So I think pretty much all across the board. And clearly, the AI for the solution that we provide in AI for retail and smart city right now seem to have the most momentum, and certainly followed by that is on the agricultural side. As I mentioned on the call, with the African swine disease, it's a major -- it's a major crisis level right now that's happening in China. So we have begun or -- and/or are about to begin across all these different projects. I would say typically, after we finish a particular contract, we look to collect the revenue shortly after -- collect the cash shortly after.

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Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8]

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Got it. And then the 3 kind of contracts you called out, I think there's a U.S. shopping mall; there's a fast food company with a couple of thousand locations I think in the U.S.; and then you said sort of a large European/U. S. retailer. Are those clients that are prospects or are they paid pilots? Do you have signed contracts with them? Just a little more clarity would help.

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Kai-Shing Tao, Remark Holdings, Inc. - Chairman & CEO [9]

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Yes. We are past the -- I'd say for the most part, we are either in the final stages of testing or past the testing part, and we're in the contract stage right now.

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Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10]

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Great. And then on Sharecare, can you just indulge us a little bit more? I think at our conference, you said more to come. So maybe as it pertains to just capital on the balance sheet. So one, the proxy has some commentary about additional parties interested in Vegas.com. Any kind of update there? And then two, as it pertains to Sharecare, I mean, how do we think about kind of monetize (inaudible) over the next 6 to 12 months?

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Kai-Shing Tao, Remark Holdings, Inc. - Chairman & CEO [11]

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Yes. So as it relates to VDC, we can't comment on the additional bidders. I think with the transaction value that's been given out there, there's been a number of different groups that have approached us that thought that, perhaps in their own ecosystem, the value could be higher. So we'll see more to be as soon as there's something that's actually formal and finalized, then that's when we'll give an update on that side. As it relates to Sharecare, I think that is something that we've been talking about for several years. The business right now is doing very well. And it's always in strategic conversations, not really with the financial investors, but really more with the strategic partners, on how they could get their kind of health fingerprints to be moving the fast way across the U.S. So they've been in discussions, we're always in discussions, and I see something that's going to happen, something in the very near future.

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Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12]

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Great. And then just the last one. Did you guys use [a buyer to] raise any money in the fourth quarter?

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Alison Davidson, Remark Holdings, Inc. - Interim CFO [13]

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In the fourth quarter? No.

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Kai-Shing Tao, Remark Holdings, Inc. - Chairman & CEO [14]

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No, we did not.

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Operator [15]

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And we will pause a moment. And at this time, I'd like to turn the conference back to management for any additional or closing remarks.

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Kai-Shing Tao, Remark Holdings, Inc. - Chairman & CEO [16]

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No? We look forward to keeping in touch with you on next quarter's call. Any questions, please reach out to Alison or myself or go on to our website at www.remarkholdings.com. Thanks.

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Operator [17]

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Ladies and gentlemen, this concludes today's discussion. We appreciate your participation.