Remark Holdings, Inc. (NASDAQ:MARK) Q3 2022 Earnings Conference Call November 14, 2022 4:30 PM ET
Company Participants
Fay Tian – Vice President of Investor Relations
Kai-Shing Tao – Chairman and Chief Executive Officer
Robert Gatchell – Chief Safety and Security Officer
Todd Brown – Vice President of Finance
Conference Call Participants
Stephen Wagner – Integrity Wealth Advisors
Operator
Good day, and welcome to the Remark Holdings Third Quarter 2022 Financial Results Conference Call. Today’s conference is being recorded.
At this time, I’d like to turn the conference over to Fay Tian. Please go ahead.
Fay Tian
Thank you, Justin. Good afternoon, everyone, and welcome to Remark Holdings’ fiscal third quarter 2022 financial results conference call. I am Fay Tian, Vice President of Investor Relations for Remark. On the call with me this afternoon is Kai-Shing Tao, Remark’s Chairman and Chief Executive Officer; Mr. Todd Brown, Vice President of Finance; and Mr. Robert Gatchell, Chief Safety and Security Officer. In just a moment, Mr. Tao will provide an update on our businesses and Mr. Brown will recap our third quarter financial results. And we’ll have Mr. Gatchell to talk about our recent development since enjoy and some other exciting business opportunities with our technology.
Following these remarks, we will open the call to questions. But before I turn the call over to Mr. Tao, I would like to take this opportunity to remind you that some of the statements made today may be forward-looking statements. These statements involve risks, 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.
I will now turn the call over to Remark’s Chairman and Chief Executive Officer, Mr. Tao, so he can provide additional color on Remark’s businesses and recent developments. Shing?
Kai-Shing Tao
Thank you for taking the time to listen to our third quarter update as we have much to update on. In the third quarter, we’ve continued to execute on our plan to continue to build the foundation to scale our Remark AI platform globally. Starting here in the U.S., we won our first contract with a major top 10 sports and entertainment arena with more than 2.5 million annual visitors, and attached to a major transportation hub with over 20 million visitors annually. Rob will go into further detail later but we are confident this is a strong indicator of what is ahead of us, not just in the U.S. but globally.
We have continued to expand our footprint in all things security related in the U.S., to airports, supermarkets, smart traffic and more. In our world, three things need to happen: Number one, you need the technology; number two, you need the customer base; and three, the customer base needs the funding. Up until recently, we’ve had points 1 and 2 covered. With President Biden’s $3 trillion Infrastructure Bill, we are now seeing point 3 covered. We are seeing an unprecedented opportunity to tap into the funding that has been released to build back and modernize the U.S. This is a once-in-a-lifetime opportunity, and we must grab it.
Remark AI will leverage our critical position as a provider of solutions addressing public safety and security that the U.S. needs. Our strategic partnerships with video management system providers, such as Genetec and Axis provide both the validation and distribution for our award-winning artificial intelligence solutions to a new range of customers. This builds upon the solid foundation we have created, putting us in the best position for success in the coming quarters.
Moving across the Pacific. With the conclusion of the National Party Congress in China, we are optimistic that the stringent zero COVID policies will be loosened sometime in the next three to six months, which will allow us to continue to go back to full speed in our deployment with China Mobile and Bank of China’s retail branches. Just to remind you, these are very large contracts, and it is a question of when, not if.
Our other highlights in the third quarter for China, despite the stringent zero COVID policy, they include Remark AI Smart Campus solutions, which were deployed at more than 70 campuses in China, bringing our total installations to more than 530 campuses, and now we cover in excess over 1 million students. In addition, we recently launched our student evaluation system using our AI platform, and we will use that and sell on — we will sell that on top of our current safety projects.
In the Smart Construction industry, we have now completed an initial 60 site installation project — and compared to the previous quarter — and we’ve now also completed an additional 19 installations — I’m sorry, building — we completed in the 19 installations during the third quarter on top of what we initially have done. Our total installation is to — is at 86 sites, and we continue to work towards the completion of our second 60-site project. Each initial construction project generates $100,000 in revenue initially and is expected to grow as China opens up.
In the last quarter, I mentioned our positive momentum across the Atlantic and to the UK and Continental Europe. We expect to have positive news to share over the next quarter as we have been quite successful in taking our existing technology platform and expanding it there. Similar to the U.S., we have partnered up with large integrators and VMS companies to expand our footprint efficiently and effectively. Our areas of focus like the U.S. are on large-scale infrastructure projects primarily with tunnels and bridges.
One example of a project in the UK is for a major crossing road with an average daily use of over 130,000 vehicles. Our analytics detect vehicle stoppage, speed, vehicle type, vehicle driving in the wrong direction, people exiting their cars, delays and unknown objects on the road. Again, we are very excited for the next couple of quarters for our shareholders to see the good results that have come from over the last year, and we expect the momentum to grow as we announce and commence each project.
Before I pass the call over to Rob to go over our U.S. business, I want to take a step back to talk about how we got here. We have never received private equity or venture capital like our competitors since we began to build our business. Having said that, we believe we have built a much stronger business as we’ve built our technology from the ground up. We are scaling to profitability as we are benefiting from deploying the technology developed over the past five years, but we are not there yet. Our ability to continue to finance our business operations is still dependent on our access to the capital markets and has always been dependent on the support and trust of our public shareholders.
For such a reason, we are asking our shareholders to approve the reverse stock split described in our recently filed proxy statement so that we can preserve our NASDAQ listing and continue to raise equity capital to fund the massive opportunities we are capturing in 2023. The initial projects we are winning in Q3 and Q4 of 2022 naturally convert into scalable, recurring, annual subscription contracts, which requires an increased investment in hardware and software support. As one of the largest shareholders, I fully recognize and acknowledge the impact of shareholder dilution as it has hurt patient investors who have supported us in the past five years, while we have been developing our AI-powered Smart Safety Platform. Though such dilution has also impacted management the most, we are confident the commercial deployment of our Smart Safety Platform, combined with the expected funding provided by the Biden Infrastructure Bill, lays the groundwork for a strong return on investment, leading to future accretive cash flow and earnings. We therefore urge you to vote in favor of the reverse stock split proposal and the proposal to approve the potential issuance of 20% or more of our common stock pursuant to our convertible subordinated debenture and equity line of credit with Ionic Ventures, each of which is described in our recently filed proxy statement.
We remain available to discuss any of this with any of you, and thank you in advance for your continuing interest and support of Remark Holdings. Rob?
Robert Gatchell
Thank you, Shing, and thanks to everyone who joined our call today and give me the opportunity to update you on the operations portion of our business. I am happy to report that much progress has been made, and we continue to have a presence in the homeland security space. I have been reappointed to the TSA, Service Transportation Security Advisory Committee. For those unfamiliar with this committee, it is a committee that advises the TSA administrator on surface transportation security matters including the development, refinement and implementation of policies, programs, initiatives, rule-makings and security directives pertaining to service transportation security. There are a few private sector companies that have a representative on this committee.
As such, Remark is seen as a critical component in the homeland security space that provides support and superior technology solutions to key industries. I am committed to leading the team into the next phase of our success in helping the company evolve into one of the leaders in risk-based technology solutions, not only in Europe and Asia, but also in North America and South America. We are building upon our award-winning technology and a wave of momentum will soon reveal the fruits of our labor. We have recruited a business development team of former security professionals who are known as product evangelists and are well-respected leaders providing the latest security solutions.
The past few months have been spent analyzing our business model in the industries and verticals that we have engaged with. After a competitive process, we have been selected to implement the first phases of private and public sector security projects in the aviation, entertainment and retail industries with clients in Florida, Nevada and South America. One highlight in Q3 was winning one of the top 10 sports and entertainment arenas in the U.S., with over 2.5 million annual visitors while being part of a transportation hub with more than 20 million passengers that pass through annually.
We are helping to deliver the safest arena experience possible to fans, guests, employees, players and performers. Our Smart Safety Platform features allow for intrusion detection, people counting, behavioral analysis, detection of loitering, suspicious object detection fire and smoke detection, intelligent investigation and trespassing detection. This is only the first phase of the integration to improve the perimeter security with data-driven intelligence, actionable insights and real-time alerts on potential security breaches around the clock. We are confident that this will be the first phase to many subsequent phases and even more importantly, allow us to expand quickly into other sports arenas and stadiums, as well as big city traffic hubs where security is the #1 priority.
Another highlight in Q3 is that Remark AI is providing a solution that streamlines the operations of one of the largest airports in the U.S., with over 45 million annual passengers. One of the applications we are providing solves the issue of inoperable conveyances such as mobile walkways and escalators within a designated area by alerting the application operator in real time when a conveyance stops working as intended.
The alert gives the operator the ability to resolve a problem quicker by rapidly deploying the proper resources to return the conveyance to working order, which in turn provides a better passenger experience. In addition, our technology is used for loss prevention. One example of our solution is that we are learning application operators in real time when persons known to have previously committed tests at the customer’s locations are present at a customer location to prevent any new losses with potentially stolen goods. The deliverable results is increased revenues while providing better inventory control for the client.
The third project I would like to mention is right here in our backyard in the City of Las Vegas. We have provided an entertainment experience space with over 60,000 daily visitors and over 6 million visitors annually with a solution to monitor crowd flow, identify unattended objects and capture attendees that are within a given entertainment space. The solution allows the customer to operate with a high level of security and it provides the application operator with better situational awareness and data that allow for more rapid operational decisions.
Also, we are continuing our work with the customer on other security solutions that they have requested. The project is a great example of our ability to utilize our risk-based methodology to provide customers with a more comprehensive solution. The next four to six months will be an extremely busy and exciting time for all stakeholders, some existing and prospective clients cannot be mentioned by name but the results of our work with such entities will be seen over the next few months.
There is no lack of opportunity and our product is being recognized as a force of innovation in various industries. Our recent projects and prospective clients are involved in the transportation, construction, sports and entertainment venues, retail, hospitality and security sectors. As I mentioned during the August call in an unpredictable world, risk comes in many forms. The ability to be resilient and to protect people, assets and reputation while managing risk is critical for any organization. Our focus will remain on helping clients and communities build that resilience through an extensive understanding of their assets, risks and vulnerabilities. Remark is a company built around resiliency and the ability for us to provide subservices will be the driving force behind our success.
Thank you for your time, and I look forward to providing future updates and showcasing our continued path of success. And now I will let Todd Brown, Vice President of Finance, present financial results for the third quarter of 2022. Todd?
Todd Brown
Thanks, Robert. As has been the case, our teams in China have had to continue to work very hard to overcome the effect of the continued lockdowns and other stringent measures implemented under China’s zero COVID policy. However, we believe that with the conclusion of the National Party Congress in China that the loosening of these policies will happen some time in the next three to six months, thereby allowing us to resume our deployment of China Mobile retail branches and Bank of China’s consumer banking branches, which have been closed to visitors since the onset of COVID.
In addition, we look forward to resuming its full speed our AI deployments with construction sites in school campuses. Despite all these obstacles put in our path, we are still able to complete larger projects including construction projects, Smart Campus deployments at schools than we were able to complete in the same quarter of last year.
Total revenue for the third quarter of 2022 was $2.8 million, which is a 130% increase from the $1.2 million during the fiscal quarter of 2021. Revenue contributed by our U.S. business decreased primarily due to a $0.2 million decrease in advertising business related to a daily fantasy sports project in the prior year’s third quarter, which did not repeat in the current year. But at the same time, our revenue from China operations grew by nearly 230% to $2.7 million. Construction project completions contributed about $1.9 million of the total China revenue, with the remaining amount of revenue being primarily due to the completion of Smart Campus deployments in various school districts.
Gross profit of $0.4 million remained essentially unchanged in the third quarter of 2022 compared to the prior year’s third quarter, though such amount represent a gross profit percentage of 12.6% in the current year quarter compared to 30.8% in the same period of last year. Our operating loss of $6.7 million in the third quarter of 2022 showed only a de minimis increase from the operating loss in the comparable quarter of the prior year. The increase in revenue was offset by changes in several operating expense categories. Of those increases in our operating expenses, the largest during the third quarter was a $2.3 million recognition of bad debt expense as we increased our provision for bad debt related to accounts receivable from certain China customers. Such action was the result of our evaluation of such customers’ accounts in light of the ongoing zero COVID measures we have discussed throughout today’s call.
Net loss was $8.9 million or $0.08 per diluted share in the third quarter ended September 30, 2022, compared to a net income of $72.7 million or $0.72 per diluted share in the third quarter of last year. The prior year third quarter included a $78.9 million gain on the revaluation of the company’s investment in common stock of Sharecare, Inc., and the value of such assets has declined significantly since the prior year due to macroeconomic and stock market conditions.
On September 30, 2022, our cash balance totaled $0.4 million compared to a cash balance of $14.2 million at December 31, 2021. Net cash used in our operating activities was $13.6 million during the nine months ended September 30, 2022. We recently disclosed that we raised $2.5 million with the issuance of a convertible debenture to Ionic Ventures, an entity with whom we also executed an agreement giving us access to a $50 million equity line of credit to fund the necessary hardware and software development and support we need for deals we are executing in 2023 and beyond. As Shing previously mentioned, we are holding a special meeting of stockholders on December 6, 2022, at which we are asking stockholders to vote in favor of a reverse stock split proposal and a proposal to approve the potential issuance of 20% or more of our common stock pursuant to the convertible debenture and the equity line of credit with Ionic Ventures. Approval of these proposals is vital to allowing us to continue to access capital markets, and as positive contract wins and operational performance leads to long-term shareholder earnings accretion. As a result, I too would respectfully request that our shareholders vote in favor of these proposals.
And with that, I will turn the call back over to Fay.
Fay Tian
Thank you, Todd. With that, I’ll turn the back — the call back to the operator, and we’ll now open the conference call to questions. We encourage callers with questions to queue up with operator as soon as possible so that there will be minimum lag time between each caller. Justin, could you please instruct the callers how to queue up with their questions?
Question-and-Answer Session
Operator
[Operator Instructions] And our first question will come from Steve Wagner with Integrity Wealth Advisors.
Stephen Wagner
Hi, Shing and everybody. Thank you very much for hosting this call. Hopefully all is well. All right, so my question is — so here’s my question to you. It feels like you have developed a really good management team. I’ve always known that you’ve had amazing vision and passion for the technology, and that is — it feels like it’s coming to fruition. And obviously, some of the announcements that you’ve alluded to, give a lot of encouragement. Are you able to — you talked about today a path to profitability, it was great to hear that. Is there any time line there that shareholders can look forward to based on the assumption that these company proposals are approved, and that the business that you have in the queue is able to be executed on. Would you be looking for profitability in 2023?
Kai-Shing Tao
Yes is the short answer. We think we certainly like to give ourselves, I’d say by the end of next year that we will be profitable. Like — I think we’ve talked about on our previous calls, we have a very scalable model. And we’re just talking about the U.S. in terms of how we are selling our software solutions.
Obviously, if China continues to — if it reopens the way we think it will, then that profitability day will happen sooner and certainly what we’re working on with the — well in the UK and in Continental Europe. So we are targeting Q4 of next year to be profitable, where our business is lean and our revenue model is very scalable.
Stephen Wagner
Thank you for that. I had a hard time getting on the call today, and I apologize I got a little touch of the flu, so my voice is a little bit strained. But I saw the revenue, I think, was — you mentioned $2.8 million. But only $400,000 of that has come from U.S. operations. Did I get that right? If that’s correct, is the balance from revenue that is being retrieved from China business is already been done?
Kai-Shing Tao
Yes. So the bulk — definitely the bulk — Todd will follow up with you on the specific breakdown. But I would say that certainly, the bulk of the business for third quarter came from China, which we were very happy about given the situation. And certainly, as compared to last year, we were more than double that number.
The — again, with the conclusion of the National Party Congress, we’re seeing a lot of signs that the economy in China will open up much sooner than people expect. You’ve already seen some recent announcements with how they’re handling the property sector, say, for instance, and the markets in Asia has been very — has had a very positive response to that over the last couple of days. So, yes.
So basically, I would say this quarter is just another step for us to kind of build that foundation, to grow our business here in the U.S. We have the customers. We’ve integrated with the largest VMS operators to show that our technology is very real, and they need us. And so really, over the course of Q4 and Q1 of next year, it’s really just blocking and tackling and getting across the finish line. But — so we’re very excited about that.
Stephen Wagner
Okay. Can you give an update at all on, say, for example, the Brightline business — at all?
Kai-Shing Tao
Well, we can’t at this point. But we will do that certainly over the next six weeks, I believe.
Stephen Wagner
All right. And then had some interesting tweets that you’ve put out on theft detection. I think that’s very exciting, super important, a lot of applications, a lot of verticals there. Can you give an update in terms of what kind of customers you’re working with, what you feel the prognosis is for that application of your AI?
Kai-Shing Tao
Yes. No, absolutely. Yes, I mean, I think as you just mentioned, it touches across a lot of different industries. It deals with home centers, supermarkets, certainly subway station and metro, anywhere with high traffic. Just to be clear what I mean by home center, it means like a Home Depot or a Lowe’s kind of situation. Anywhere that has a lot of traffic where stuff happens a lot. And certainly, I think we’ve alluded to, in the past quarter’s call, we’re very much involved in the bidding for contracts as it relates to airports and metro stations in large cities like L.A., Miami, Chicago, New York City.
So that’s something that is a requirement that our potential customers need. So we — our technology works very well in that. But even more importantly is that we’re able to provide 10 to 15 other solutions where the customer really just has to work with one vendor. Hopefully, that will be us and — because we don’t really see other groups providing those type of features like the way we do it.
Stephen Wagner
Okay. And in connection with that, would this have anything to do with the Milestone Systems release that you put out the other day, or is it completely different? I’m not super intelligent on all of this. But I mean, that sounded like a really good announcement. I’ve read it a few times. They’ve got over 500 different customers…
Kai-Shing Tao
Yes. I mean the Milestone and Genetec are — they’re essentially our partners, right? They’ve been around for a long time. Have a lot of customer reach. They came to us because they needed an AI component. Obviously, working with them is a great validation to our platform. So once we signed the deal with them, we were able to integrate with their platform, and now they can push us across to all their customers. But just to give you an example, the Genetec and Milestone are two of the largest security customers, right? So it’s something to make that sell-through much faster — and so we’re very much excited about that.
Stephen Wagner
Okay, all right. And then are you confident with the given shareholder base that Remark has that we can get these proposals through? It’s been a bit of a challenge in the past. Have you guys tried to create some avenue to make it smooth at this time as opposed to last time? Any feelings on that?
Kai-Shing Tao
Yes. I think we have a predominantly retail shareholder base, so it’s sometimes hard to handicap that. But we do believe and are confident that the true long-term shareholders kind of see through the noise and the smoke, and conceive we’ve have been building and have built and what our prospects are ahead.
And we certainly feel — so we’re confident about that. There are always naysayers and short sellers out there that try to confuse the facts. But we believe — we do believe that in our shareholder base that if you’re in, you’re in for the right reason, and they have done their work on us.
Stephen Wagner
Okay. And the $2.5 million that you just contracted for finance — financing. Can you give any time line in terms of how long that will keep everything afloat until we get these other revenue sources?
Kai-Shing Tao
Well, it’s — we signed a — it’s a $50 million equity credit line, right? So there’s obviously a bunch of bells and whistles to that on how we’re able to tap that. But I think a lot of the business prospects that we have mentioned, we see them as imminently happening thing within this quarter or next rather than saying, “Oh, at the end of next year.” So I think that will allow us to — it’s going to be very favorable to shareholders, and we’ll be able to tap that at much more better valuations of where we are today as shareholders recognize what we’re doing.
We have been quiet on purpose because we don’t want to tell our competitors where the money is. And so pretty soon, we’ll feel very comfortable and much more comfortable on sharing who our customers are, what type of deal we’re working with them. But until then, it has definitely hurt us in the past because as investors are listening to this call, so are our competitors.
Stephen Wagner
Okay. And then one final thought — thank you for that Shing. One final thought, having to do with the reverse split. A lot of times, those are very challenging and that’s just putting it very mildly. They can work, but it’s got to be in conjunction with some of the things that you’re talking about: Good news, contracts, things like that. It feels like it feels like that’s the message that you’re sending out. Is that a fair interpretation?
Kai-Shing Tao
Yes. You’re 100% right. We wouldn’t do a reverse split unless we had strong fundamental news behind it. This really speaks to our operations and really that’s what we want to get us to where we think we can be.
Stephen Wagner
Very good. Well, thank you. I’ve taken enough of your time. I appreciate your hard work, your team’s hard work. And obviously, let’s keep it rolling.
Operator
[Operator Instructions] And that does conclude the question-and-answer session. I’ll now turn the conference back over to you.
Fay Tian
Thank you, Justin, and thank you, everyone, for participating in Remark Holdings Third Quarter 2022 Financial Results Conference Call. A replay will be available in approximately 4 hours through the same link issued in our October 31 press release. Have a good evening. Thank you.
Operator
Thank you. That does conclude today’s conference. We do thank you for your participation. Have an excellent day.
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