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Edited Transcript of MARK earnings conference call or presentation 13-Nov-17 9:30pm GMT

Q3 2017 Remark Holdings Inc Earnings Call

Atlanta Nov 16, 2017 (Thomson StreetEvents) -- Edited Transcript of Remark Holdings Inc earnings conference call or presentation Monday, November 13, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas M. Osrow

Remark Holdings, Inc. - CFO

* Kai-Shing Tao

Remark Holdings, Inc. - Executive Chairman and 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

* Michael Fawzy Malouf

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Head of Boston Team

* George Kafkarkou

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to Remark Holdings Third Quarter 2017 Earnings Conference Call. My name is Pilar, and I will be your operator this afternoon.

Joining us for today's presentation are Remark Holdings Chairman and CEO, Shing Tao; and CFO, Douglas Osrow. Following their remarks, we will open the call for questions.

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 that the company uses financial measures not in accordance with generally accepted accounting principles, commonly known as GAAP, to monitor the financial performance of operations. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the reported financial results as determined in accordance with GAAP. To support the company's views 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, Mr. Shing Tao. Please proceed, sir.

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

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Thank you for taking the time to join us. We are very pleased with our artificial intelligence platform, otherwise known as KanKan, continues its strong growth into 2017 fourth quarter, which allows us to exceed our 2017 guidance and more importantly, continue the very strong momentum into 2018 where our current internal forecasts are set at USD 30 million or greater in 2018. I'll go into details on how we will achieve this later -- a little later on.

KanKan is unique in its breadth and depth as an AI platform. We are not just an AI-based FinTech company. We are not just a facial object recognition company. We are not just a natural language processing company. We are a company that provides a combination of AI technologies that solve problems for our customers in one solution. As you know, the strength of any artificial intelligence platform is a function of how comprehensive the data that trains the models are. Almost 4 years ago, we laid the vision to you in building a technology platform within Remark Holding that not only allowed us to create a moat around our business but more importantly, to become a leader than a follower.

We took a few years to create -- first create the technology; and second, use the technology to amass the data. From that point, our technology was able to turn the unstructured data into data we can use. Because we took this long-term strategy to build the platform with the best foundation, we have become one of the leaders in the artificial intelligence field. Our products are built and owned by us, and one of the key pillars to the strength of our foundation is the ability to create monetizable products quickly and efficiently in many industries.

Going into 2018, we are very proud we are executing on that vision and more importantly, look forward to the many challenges ahead of us in keeping that position. To better serve our customers and provide better products and services in various areas under KanKan, we formed 2 business units: KanKan FinTech business unit and KanKan AI and data solution business unit. I will briefly go over each business unit's focus and their status.

First, KanKan's FinTech business unit. The core value of KanKan's FinTech is built off of our AI-based risk management models trained based on social data, shopping data, location data, financial data and other related public available data. Since our last quarterly call, we have expanded our suite of solutions: first, quality lead acquisition; second, Social Credit Score and risk management; third, social listening and loan monitoring; and fourth, professional debt collection. This expansion allows our SaaS-based FinTech platform to provide a complete consumer financing solution to our customers, whether they need us to help them with one or more areas or the entire platform to support their consumer loan business.

Combining KanKan's data marketing power to KanKan's unique social credit check, we are now able to provide our financial institution customers with high quality, high conversion and low default rate loan customers, which allows us to take a percentage of the overall loan amount made. This is a tremendous opportunity as we can now benefit from the $300 billion industry in just consumer loans alone in China, which is growing at a 30% annual growth rate.

In the third quarter, we have started to execute our lead gen business by helping our customers loan out over RMB 100 million with an extremely low default rate. We're excited to see 10 additional similar financial products in the pipeline in Q4 of 2017. With an expanded partnership with Alibaba and other financial institutions, we'll continue to improve our models and create new FinTech products to serve our customers better.

Now moving on to KanKan's AI and data solution business unit. KanKan's AI solution business unit focuses on providing our customers with big data, computer vision and natural language processing based products and solutions. The 3 core areas that KanKan's AI business is based on is: one, deep learning base facial recognition, point detection and filtering; two, AI-based image, object recognition; and three, natural language processing.

The uniqueness of KanKan's AI is that we can quickly train specific models with relatively small amount of data samples, which makes us extremely flexible and efficient to apply our solutions to customers' business with a fast time to market. KanKan's AI platform develops new features and monetizable products every few weeks. With the development of new AI models, KanKan's AI has been adopted in many verticals, including security, public safety, education, travel, food management, social media and et cetera.

KanKan's AI solutions that we've provided have led to recently announced contracts. Sina Weibo's mobile app, number one. This app uses our leading 110-dot 3D facial tracking technology to provide the most smooth and accurate 3D augmented reality experience to all of Sina Weibo's users. Number two, the open kitchen project by the China's Food and Drug Administration. KanKan's smart eye system will be used in first 200 restaurants in Shanghai this year and over 2,000 plus in 2018 to enforce food safety policy for restaurants. Sefon, a leading solution provider based in China, awarded a multimillion-dollar contract to KanKan for our powerful computer vision technology that can automatically tag and index live or archived video content via real-time object recognition.

There are over 15 signed contracts or MOUs in the pipeline for fourth quarter 2017 and '18, and more companies are testing our technologies. Many of them will result in multimillion dollar -- multimillion dollars in revenue.

As for KanKan's big data business, we recently announced the partnership with Acxiom, one of the world's largest data service companies. And we are working together to provide the best data solutions for high-value customers in and outside of China. With the showcase of our data in AI capabilities, we're expecting more data companies like Acxiom, Epsilon, to join KanKan's data platform and work with us to provide revolutionary data solutions.

For -- as it relates to KanKan's IP, we have filed 22 AI-related patents in Q2 and Q3, and we are building up our IP portfolio quickly for the remainder of 2017 and coming 2018 to continue to be the leader in the AI space.

As a testament to our achievements, we are invited to speak at the World Internet Conference in Wuzhen, China in early December. This is widely considered to be the most prestigious Internet conference in China.

In conclusion, the massive growth we're experiencing in 2018 and looking into 2019 will be driven through organic growth. We are not relying on acquisitions to achieve the numbers we have set in front of you today.

Now moving to Vegas.com briefly, and Doug will go over the financial highlights. BDC saw the largest improvements in conversion in the company history. Conversion improved 30% year-over-year for our Vegas.com business. These improvements in conversion were key catalysts in driving our ticketing business to its single-best month ever. In August of 2017, we've sold more show tickets to consumers than any other month in the history of the company. In fact, every month in the third quarter of 2017 ranked in our top 4 months all time in show ticket sales.

Not to be outdone, the conversion improvements also aided our hotel business. Our hotel vertical experienced the single-largest improvements during the month of August, growing room night sales at our fastest pace ever. Overall, this led to an increase of 25% in transactions over the same period a year ago. This improvement also represents the largest growth in transactions in our history.

Finally, a brief update on Sharecare. Sharecare was ranked among the fastest-growing companies in North America on Deloitte's 2017's Technology list. By growing its revenue by 398% between 2013 and 2016, Sharecare received an official ranking of 242 among the public and public -- among the private and public technology companies on the Fast 500.

Doug?

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Douglas M. Osrow, Remark Holdings, Inc. - CFO [3]

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Thanks, Shing. After the market closed, we issued a press release announcing our results for the third quarter and 9 months ended September 30, 2017, a copy of which is available in the Investor Relations section of our website.

Now to our results. Our net revenue for the third quarter of 2017 increased 28% to $19.4 million from $15.1 million in Q3 of last year. Of this amount, revenue from our KanKan business accounted for approximately $2.2 million in the third quarter of 2017. For the 9-month period, our net revenue increased 17% to $52 million from $44.4 million in the same period last year. KanKan revenue accounted for $3.2 million of our total net revenues in the first 9 months of 2017.

Turning to our expenses. Our total cost and expense in the third quarter of 2017 was $25.4 million, which was up from $19.3 million in Q3 of last year. For the 9-month period, our total cost and expense was $68 million compared to $57.2 million in the same period last year. Our operating loss during the third quarter was $5.9 million, which compares to $4.2 million in the third quarter of last year. For the 9 months, our operating loss was $16 million, which was an increase from $12.9 million in the same period of 2016.

Our net loss for the third quarter of 2017 totaled $13.3 million or $0.58 per diluted share. This compares to a net loss of $15.3 million or $0.75 per diluted share in Q3 of last year.

And finally, for the 9-month period, our net loss totaled $17.6 million or $0.70 per diluted share compared to $23.1 million or $1.15 per diluted share in the same period last year.

Now turning to our balance sheet. Our unrestricted cash was $16 million at September 30, 2017, plus we maintained a restricted cash balance just shy of $11.7 million, bringing our combined cash position to $27.6 million at quarter end. This compares to a combined cash position of $18.5 million at December 31, 2016.

We have received many questions regarding what the impact of the tragic events on October 1, 2017, have had on our operating results. Above all, we want to thank all of those who reached out to us to ensure that our employees were safe. The event did not impact the third quarter of 2017 as we reported an increase in EBITDA from the travel and entertainment segment of our business of almost 10% to approximately $2 million. And it's also worth noting that Vegas.com had 19 of its top 20 show ticket sale days in its history since July 1 of 2017.

While the tragic events affects our difficult to quantify and revenue and EBITDA, we believe we will report approximately $0.5 million less in EBITDA from the travel and entertainment segment during the fourth quarter of 2017 than we had internally estimated prior to the event, largely stemming from the supplier-driven cancellations the week following October 1.

Shifting gears, I'd like to provide a limited view of certain of our positive expectations for 2018, starting with the travel and entertainment segment, which we expect will generate gross revenue of more than $325 million and net revenue between $65 million and $75 million during 2018. We also anticipate that our EBITDA margin will be between 10% and 13% of net revenue.

More importantly, for our KanKan business, we expect to report more than $30 million of revenue during 2018, which could quintuple the revenue we expect to report for all of 2017.

As I conclude my financial summary, I wanted to point out that I will be at ROTH in the Craig-Hallum conferences in New York this week. If anyone wishes to set up a meeting, please contact me at your convenience.

And with that, I'd like to turn the call back to Shing. Shing?

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Douglas M. Osrow, Remark Holdings, Inc. - CFO [4]

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Thanks, Doug. And with that, we're open -- we're ready to open the call for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And 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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Just a couple of things, if I may. I know you had said at least $5 million in KanKan revenue (technical difficulty) looking, but does that kind of imply that you'll be $6 million or better? And then, I'm sort of curious about the composition of some of these deals. How much of the business is in the quarter or kind of going forward is starting to have a recurring component to it?

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Douglas M. Osrow, Remark Holdings, Inc. - CFO [3]

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Darren, I'll start with the first part of the question. I believe you were asking about our $5 million guidance for -- revenue guidance for KanKan this year, now we're implying that we'll do $6 million. You cut out in a little bit of the question, so I just wanted to confirm that, that was your question.

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

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It was, yes.

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Douglas M. Osrow, Remark Holdings, Inc. - CFO [5]

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You are correct to assume that we're going to go from $5 million to approximately $6 million for the year of 2017 in KanKan, and we expect, again, to quintuple that to north of $30 million next -- in 2018.

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

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And then, I guess, a couple more, if I may. The composition on the KanKan revenue, what portion of that business is coming in or was in the quarter is recurring? And then my other question would be around your $30 million number. How much of that is sort of Asia Pac-based as opposed to kind of any other geographies outside of Asia? And are you seeing more inbound increase that are sort of non-Asian in nature in terms of the KanKan business?

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

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Yes. So number one, it is recurring. The bulk of our revenue at this point is primarily -- is coming from FinTech. And we see that as being a large growth driver for us. Really, one on the FinTech side, we've mentioned about the food safety program. That's going to be -- these are all businesses that would pay us as a -- on a recurring basis. The bulk of the business that we're seeing is primarily China-based. Having said that, AI, obviously, is a global force, and we've been approached by a number of different companies from all over the world, whether it's from the U.S., Europe, Latin America, Southeast Asia in using our technology. And that could be for a variety of things from FinTech to public safety and et cetera.

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

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And then maybe one more, if I may. With Alibaba and TenCent, is any of that kind of revenue contemplated next year going deeper within those conglomerates versus kind of your initial foray with each company this year?

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

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I think as you can imagine, Darren, Alibaba and TenCent are so big, so it's pretty tough to navigate through China without somehow touching upon something like tentacles there in that sense. So yes is the short answer, but I think what's exciting is that a lot of the business that we're seeing is in addition to non-Alibaba or TenCent-affiliated businesses.

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Operator [10]

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(Operator Instructions) We'll move next to Mike Malouf with Craig-Hallum Capital.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Head of Boston Team [11]

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When you take a look at this ramp in KanKan, it's pretty dramatic. You went from basically $1 million a quarter to $30 million a year. I'm just wondering, is that $30 million comment, is that -- how much visibility do you really have on that as we stand right now because we're still in November? And can you give us a breakdown between how that breaks out between FinTech and then your AI and data solutions side of the -- of that business?

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Douglas M. Osrow, Remark Holdings, Inc. - CFO [12]

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We probably won't give -- go into the breakdown of the segment, but it'll be primarily FinTech-driven. But in terms of the visibility, it's very clear in front of us. We're looking to see the variables right now is how do we take that $30 million and grow it even faster over the course of 2018.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Head of Boston Team [13]

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So this is basically business that has been won so far, and that if you're able to win some new business over the next 6 months or so, that could actually be accretive to that number?

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Douglas M. Osrow, Remark Holdings, Inc. - CFO [14]

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Yes. Absolutely. I mean, we're -- our positioning and where we stand right now going into almost the third week of November is how do we position ourselves in growing that number for 2018. So the $30 million number that we've used right now is not the maximum that we'll see in 2018. We think we have a high probability of growing that number. But there's still a bunch of more things that need to be decided on.

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Operator [15]

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Next, we'll move to George Kafkarkou with -- a private investor.

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George Kafkarkou, [16]

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I got a couple questions around KanKan. How many unique and distinct KanKan products do we have today? And how many do we anticipate to have 6 months from now?

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Kai-Shing Tao, Remark Holdings, Inc. - Executive Chairman and CEO [17]

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I would say unique products publicly that we've released are roughly about 15 products. We have a lot of products that we come up with that go through the testing period with potential clients. And until they're ready to use our product, we don't publicly release it. But we have a strong stable of AI-based products.

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George Kafkarkou, [18]

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Okay. So I mean, I read an article. I think it was Technote that came out last week, I think it was. And that article stated that you guys have another 15 products coming, KanKan products coming. Is that article accurate?

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Kai-Shing Tao, Remark Holdings, Inc. - Executive Chairman and CEO [19]

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Now that article is accurate. How we actually go into specifics when we actually -- you'll see it as a press release, obviously, in terms of how, in terms of specific details of the product and how we monetize it. But the Technote article is accurate.

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Douglas M. Osrow, Remark Holdings, Inc. - CFO [20]

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And George, as you're well aware, one of the things that makes our AI technology so unique is how quickly we are able to scale and come up with new products because of the system that the team has developed.

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George Kafkarkou, [21]

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Yes. I'm perfectly aware of that, Doug. Thank you. And -- but that does beg my next question. So listen, we've got a world-class platform that we can build KanKan products quickly, literally in weeks. That's very obvious. If you do the math, you guys build KanKan unique products in weeks. So how do you go about prioritizing which ones you want to build?

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Kai-Shing Tao, Remark Holdings, Inc. - Executive Chairman and CEO [22]

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Well, it's tough. We obviously go for the ones that have the biggest market opportunity and then into industries where our present team can build -- we don't have to go out and hire new people or add any additional costs; we can already rely on our existing infrastructure to build those products. But as you can imagine, when you're going into a world where every company, no matter who you are and no matter what size, you need to have an AI strategy bodes very well for us.

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George Kafkarkou, [23]

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Yes. Okay. How do you guys experience feedback from the fact that KanKan, one of the benefits is that you can get access through the government firewall in China, right? Conceptually, that must be very appealing to big U.S. brands. Can you just give us some anecdotes or feedback? Or does that generate a lot of interest? Or is that just wishful thinking on my behalf as an investor?

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Kai-Shing Tao, Remark Holdings, Inc. - Executive Chairman and CEO [24]

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I mean, it attracts interest, of course. But whether that interest can be translated into something that's monetizable for Western companies in terms of -- in particular, from the media side, is a big question mark, and we've gone down that path. We're talking to the largest kind of U.S. media companies looking to go into China. It's just found that the numbers just don't add up for either side. So we haven't really figured out a solution from that standpoint, but we will.

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George Kafkarkou, [25]

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Okay. What's the Aston Martin deal, which was publicized in one of your excellent videos? Was that a local Chinese Aston Martin deal? Or was that from headquarters in the United Kingdom?

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Kai-Shing Tao, Remark Holdings, Inc. - Executive Chairman and CEO [26]

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That was working with the agency that does their advertising in China. It's an agency-led product, yes.

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George Kafkarkou, [27]

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Okay. I have another 10 questions. I will only ask one. How do you guys think about strategic alliances for KanKan? Have you been -- do you guys get approached or -- around -- because the platform you have is incredible. One of the only weaknesses I would observe, I could imagine, is that how much capacity do you guys have to utilize all the opportunities because it seems to me the opportunities are almost, without limit, in China, in Asia and probably in the U.S., too. So have you guys been approached? Or how do you guys think about strategic alliances with all the big tech firms?

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Kai-Shing Tao, Remark Holdings, Inc. - Executive Chairman and CEO [28]

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Carefully, obviously, teaming up with a large strategic partner has their benefits to us. But I think we're always very careful. I think if you look at the landscape out there globally, many -- a number of the hottest tech companies that are in the middle of legal issues have been because they teamed up with a large strategic partner, because both have 2 very different kind of motives on why they got into it. And so we're very careful as well because our goal is to enhance the -- to exponentially enhance the value of KanKan and obviously, Remark, while the other groups are probably looking more on how they can enhance their own. So it's 2 very different objectives.

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George Kafkarkou, [29]

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Yes, yes. I mean, one of the tremendous appeals for KanKan, again, for a whole landscape is the following: the big players of this world, the Googles, the Amazons, the Apples, even Facebook, the intent of their AI applications and focus on investment is to sell more of their products, right? Like Microsoft, they just want to sell as much Azure as possible, and they use AI investments to try and drive that. It seems to me we're rather unique, but we are AI for AI's sake in terms of pure horizontal plays. Am I misreading that in any way? Am I making that too simplistic, do you think? Or is that a fair reflection?

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Kai-Shing Tao, Remark Holdings, Inc. - Executive Chairman and CEO [30]

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I mean, I don't really know exactly their motive. I mean, we can just see it through our lens. I mean, at the end of the day, they create the AI. I mean, they're so big, and they have so many different resources and so many different departments, so it's very hard to place where -- what direction they're going to. First and foremost, it's obviously to help their own businesses. But time will tell. From our standpoint, we don't have the luxury of doing AI for AI's sake. We need to make money, and so that's really the first and foremost goal that we go into.

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Douglas M. Osrow, Remark Holdings, Inc. - CFO [31]

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And George, this is Doug. Happy to take more questions from you after the call. I just want to keep the call moving for the people in the queue.

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Operator [32]

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(Operator Instructions) And we'll move next to [John Grimley] with the TJW Capital.

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Unidentified Analyst, [33]

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And George asked a couple of questions I was going to ask. The one other question, and I don't know how much you'll be able to say. But as we do some of the parts work on your company, it can be a little tricky. It's pretty clear that some parts aren't being valued if we have the parts right. How should we be thinking about your Sharecare stake? Or what can you tell us about that -- do you look at that as an asset?

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Kai-Shing Tao, Remark Holdings, Inc. - Executive Chairman and CEO [34]

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Yes. I mean, we've always said that we don't look at our business as a sum of the parts business. It's taken us a few years to get to where we are and where they're now as an integrated AI platform. Moving forward, whether the business that we currently own or acquire in the future, it's all based on the same core technology of what's been built. As far as I'm concerned with what Sharecare -- and the Sharecare's business is very strong. When we look to monetize that stake, we now -- we know we have a lot of options on how and when we do it, and we obviously want to get the highest value for it. As far as the way I personally look at it, it's just my own view, is that it's just gravy. We're growing our business very fast as it relates to KanKan. Our core business -- our core cash flow business at BDC is very solid. So this is -- when Sharecare does it, I don't know, but we know it's going to be at a high number. And so when that time comes, we'll properly adjust according to it.

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Unidentified Analyst, [35]

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Got it. Okay. Great. And the only other question I had, we can do it. I'll catch up with you guys offline, just to go through some of the stuff in the Q when it comes up.

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Operator [36]

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That does conclude our question-and-answer session. At this time, I'll turn the call back over to our speakers for any final or additional comments.

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Kai-Shing Tao, Remark Holdings, Inc. - Executive Chairman and CEO [37]

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Thanks again for joining us for our call today. We appreciate your continued support, and look forward to speaking with you on our next earnings call.

Operator?

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Operator [38]

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Everyone, that does conclude our conference call for today. Thank you all for your participation, and you may now disconnect.