Remark Holdings Inc (MARK) 2018 Q2 法說會逐字稿

Good morning, and welcome to Remark Holdings' Second Quarter 2018 Earnings Conference Call. My name is [Celestina], and I will be your operator this morning. Joining us for today's presentation are Remark Holdings Chairman and CEO, Shing Tao; and interim CFO, Alison Davidson.

Following the 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, 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 result 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 the Chairman and CEO, Shing Tao. Please go ahead, sir.

Thank you, operator. Good morning from Shanghai, and thank you for joining us today. After the market closed, we issued a press release announcing our result for the second quarter ended June 30, 2018. We generated strong growth during the quarter with solid contribution from both our AI and Vegas.com businesses. Revenue from our AI businesses grew more than threefold over the prior year quarter, and was up more than 4x in the first half of the year as compared to 2017. We're continuing to make progress in working with our client to begin initial deployment of our AI technology across multiple sectors in China and Southeast Asia. We remain on plan in executing our strategy and rolling out our portfolio of AI solutions. Overall, given the size and breadth of the AI contracts we've secured and our deployment efforts underway, we remain well positioned to accelerate our revenue growth in the months ahead. As these contracts move to the deployment stage, we will begin to gradually record both upfront fees and ongoing licensing fees, with each contract having different fee arrangement based on the product deployed. As previously noted, depending on the sector, it can take 3 to 9 months for deployment of a product to commence, following the signing of an agreement with the client. To recap, our primary goal is to efficiently leverage our advanced AI technology to enable a broad range of applications across multiple sectors. Our business plan is designed to support a stream of recurring, predictable and growing revenues as our products are installed. The KanKan platform is unique in that it supports development and launch as very accessible, customizable and easy-to-install solution at reasonable price points for our client. In turn, we benefit from recurring revenue streams and lower capital cost.

Now let me briefly walk you through our progress in executing against several contracts during the second quarter, beginning with our retail business. We are continuing to actively work with client to lay the groundwork to deploy our AI products in a range of retail locations, including fresh food stores, supermarkets, convenience stores, super brand malls and fast food chains. These deals, which cover a total of 20,000 locations, vary in terms of contractual arrangement with each including an upfront fee upon location deployment as well as ongoing licensing fees or revenue share model throughout the term.

We also initially commenced the rollout of KanKan Smart Eyes for retail, our first SaaS-based AI retail product. Through our local partners, KanKan has secured agreements for the product in more than 10,000 stores in Shanghai, China. The product is off to a solid start and we believe we can grow our initial base of stores to over 25,000 in 2019 with a long-term installation goal of as many as 500,000 stores. Designed for small and medium-sized retail environment, our SaaS solution applies advanced computer vision and data analysis technology to provide store operators with powerful insights, enabling them to make quicker decisions that better serve the customers, supporting more informed sales opportunity.

In addition, during the quarter, we began working with C.P. Lotus Corporation, one of the leading retailers in China, to develop and install KanKan in their specialty supermarkets. We are planning to launch the first Lotus prototype store with our solution in September. Through these initiative, our KanKan technology is being utilized to deliver simple and easy-to-install solution that provides retail businesses with accurate insight with the goal of supporting better shopping experiences for the customers with much lower cost and higher conversion.

Our FinTech business continues to deliver solid results in the quarter. And we are in the process of developing a third path focused on loans for parking spots, which represents a sizable opportunity given the density of China's urban markets. The temporary shutdown of China's lending market due to an industry-wide regulatory (inaudible) continued during the quarter. But we are starting to see signs that liquidity is beginning to loosen as we approach September. We're continuing to monitor the audit process and regulatory implication to determine the slow impact on our FinTech operations, with the goal of making the necessary adjustments to our infrastructure and product approach.

The audit led to a reduction in a number of P2P lenders from approximately 5,000 to roughly 1,500. Those lenders that have survived the process will benefit from a more stable, fair and professional lending market. We've built our technology from scratch and have the ability to customize our solution, to adapt the change and provide value to our major customers. Given our premier banking client list and proven credit analysis product, we expect to transition this unit to deliver an updated solution that best fits the current state of the market in addition to rolling out of parking-related product.

In the public safety and surveillance market, we're continuing to work with our client in executing against a number of agreements, spanning construction site, college campuses, restaurants and traffic monitoring and enforcement.

During the second quarter, we also moved forward in executing against our agreement with our client in the food safety arena, the plans to deploy our solution in as many as 10,000 restaurants. Our revenue model in this segment includes a fixed implementation fee based on the number of cameras installed plus an annual service fee for each site. As these products are deployed and begin to scale, we expect to see substantial revenue growth over time.

Turning to the education market. Since our last call, we've made substantial progress in executing against our project for Shanghai Education Resource Center, an affiliate of Shanghai Open University, which is one of the largest online educational institutions in China. The university teaches more than 70,000 students per year and maintains approximately 1 million hours of online class content that they can dispute to various online channels. Initially announced at the start of the year, we executed on our plan and worked with Shanghai Education Software Development Corporation to develop a multimedia search platform that employs KanKan's AI technology to accurately search for and retrieve structured information from a vast universe of unstructured sources spanning digital libraries, video-on-demand, live broadcast, digital TV, video surveillance and Internet advertising.

The search platform represents an innovative solution for the education industry, fulfilling a need for faster, more convenient and more accurate access to a vast data source. It enables seamless access to a diverse and growing universe of data sources through a highly effective and easy-to-use navigation tool. The platform and our speed in delivering it demonstrates the power of KanKan's AI technology in providing highly accurate and accessible solution to complex problems.

In the entertainment market, we also recently announced our partnership with Allinone, otherwise known as AIO. A leading big data marketing and consulting company serving China's film market to support the industry's first and full process system covering data analysis, broadcasting and consulting on film performance from prerelease to postrelease across China's multibillion-dollar film market. AIO has been authorized by China's state administration of radio and television, otherwise known as SAPPRFT, to create a data analysis product using the root level data for China's film market. AIO chose to partner with us over notable competition to utilize our KanKan's AI technology to support the design and build out of the data processing and analytics system. As part of the partnership, we also invested $1 million in the venture. The Allinone solution is being developed to address the highly inefficient film forecasting environment in China, which has resulted in an elevated level of risk for all participants. The AI solution will deliver a comprehensive snapshot of film sentiment and performance, spanning preproduction, prescreening surveys and public opinion tracking as well as box office tracking and reporting. In addition to tracking down accurate data for multiple sources, combined with myriads of historical data, this solution will detect anomalies and box office fraud. We're excited about this partnership and the important solution we can bring to China's inefficient movie market.

Overall, the breadth and potential scale of the contracts we've entered into with major corporations and organizations, combined with the unique position we're building as a provider of highly accessible and customizable AI products, confirms the value that the enterprise will create is not reflected in our share price, especially when you consider the substantial valuation some of our private peers in China have attracted. Our growth trajectory is driven organically and reflects the strong execution of our business plan and our ability to grow without relying on acquisition and the related expense of doing so.

Turning to Vegas.com. We continue to substantially improve our financial and most operating metrics as reflected in our strong second quarter performance. We're capitalizing on the improvements we've made to the site in the past year to elevate the customer experience and accelerate our revenue growth. Vegas.com is a premier destination that consistently attracts a growing audience that increasingly utilize the site to purchase show ticket and hotel room and make reservation. Given that recent transaction multiples in the ticketing space have been based on a range of 4 to 5x trailing 12-months revenue, we believe this asset is substantially undervalued based on our stock price.

Further, we've released the Supreme Court's recent ruling with regard to legalizing online sports betting at the state level has only increased the overall value and growth potential of Vegas.com, which is not reflected in our share price.

In summary, we're continuing to make solid progress in executing on multiple agreements as we work with our significant and well-respected group of clients to begin deploying our AI technology across multiple sectors in China and Southeast Asia. KanKan has staked out a strong market position, and we're laying the groundwork to deliver substantial growth in the months ahead. I want to emphasize that all of our growth is organic and is based on the technology that we've built from the ground up.

Defined by rapid deployment, low maintenance cost and highly accurate and actionable results, we're leveraging the power of KanKan's technology to deliver simple solutions to complex problems across multiple sectors. We look forward to continuing to keep you abreast of our strategic progress in the months ahead.

And now before we turn the call over to questions, I'd like to hand the call over to Alison, who will walk us through the financial results for the second quarter.

Thanks, Shing, and good afternoon, everyone. Turning to our financial results for the quarter ended June 30, 2018. Our net revenue for the second quarter of 2018 increased 20% to $20.7 million from $17.3 million in Q2 of last year. The increase is primarily due to an increase in our KanKan business and an increase in show ticket revenue in our travel and entertainment segment. KanKan contributed $3.4 million to the total revenue in the second quarter of 2018 as compared to $900,000 for the same period in 2017.

Turning to our expenses. Our total cost and expense for the second quarter of 2018 was $27.8 million compared to $21.9 million in Q2 of last year. The increase is primarily due to an increase in cost of revenue and payroll cost for our KanKan business and an increase in paid search costs from our travel and entertainment segment. The increase in total cost and expense partially offset by the increased revenue resulted in a $7 million operating loss for the second quarter of 2018 compared to a $4.7 million operating loss in the second quarter of last year. Our net income for the second quarter of 2018 totaled $3.4 million or $0.10 per diluted share, this compares to a net loss of $4.3 million or $0.19 per diluted share in Q2 last year.

Net income for the second quarter of 2018 included a $10.1 million noncash gain related to a change in the fair value of our warrant liability, which occurred as a result of the decrease in our stock price during the period. For the second quarter of 2017, we recorded a $1.8 million gain related to the change in the fair value of the company's warrant liability during the period.

Now turning to our balance sheet. Our cash balance is $7 million with an additional $11.7 million of restricted cash, bringing our combined cash position to $18.7 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 grew our operations in China and engaged in multiple proof-of-concept projects, the timing of our payments related to elements of working capital and paying security deposits related to our travel and entertainment business.

Shifting gears to our financial outlook for 2018. For the year ending December 31, 2018, we are fine tuning our outlook to reflect the impact of the lending industry regulatory audit on the company's revenue for its FinTech business. We now expect consolidated revenue of approximately $100 million in 2018. After taking into account the impact of the lending industry regulatory audit, we now expect KanKan to generate approximately $25 million to $30 million in revenue in 2018. The company's forecast is directly supported by the agreement it has signed in the retail and workplace and public safety sectors, and the actual deployments that it is currently taking in conjunction with its client. We continue to monitor the China lending industry to determine any potential impact on our 2018 forecast, and the company is working directly with its large banking clients to adjust and scale its proven AI solution as well as launch a third product covering loans for parking spots. As the company's AI contract moves to the deployment stage, the company will begin to report revenue from both upfront fees and ongoing license fees, with each contract having different fee arrangements based on the product deployed.

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

(Operator Instructions) And we'll take our first question from Darren Aftahi from Roth Capital.

Just a few, if I may. First on the $3.4 million in KanKan in the quarter, can you talk about what the mix was between FinTech and non-FinTech?

$2.2 million was FinTech.

Okay. And then that other $1 million or so. Is that related to retail deployment of KanKan AI?

That was the delivery of a data platform.

Got it.

It was 1 product delivered to a customer at the end of June.

Got it. That's helpful.

It did not relate to any other sector.

Got it. So as we look at the $25 million to $30 million KanKan guidance now. I'm curious how much of that is assumed to be FinTech? And then what is the mix between, say, retail, restaurant and perhaps other as kind of a mix for the, let's call it, $21 million plus for the remainder of the year?

Darren, it's Shing. So we were -- the way that we've done -- that we're looking at AI-related revenue will be roughly $15 million to $20 million in revenue. And the remainder being FinTech, where -- from what we are seeing going to September, as I stated in the kind of in the -- just in the previous remarks, that things look to be opening up. But we're still monitoring what the new environment may be. But so we're optimistic that things are beginning to turn around. But we just want to make sure we know what we're playing with. But if things are turning out to what we hear, we think we'll be able to participate in the recovery, and in addition with the new product targeting parking loans, I think, it bodes well for us.

Great. And then can you talk about opportunities in the pipeline outside of Asia-Pac. And I guess where you think KanKan has the best opportunity to monetize? Maybe perhaps Europe or the U.S., just any non-Asia-Pac opportunities that are coming your way?

Sure. Absolutely. Yes, I think it's important to note that we've always thought KanKan as a global AI platform. And so the way we've trained our AI models and the attraction to the clients is that our data is global. It's not specific in any particular region. For me, personally, I -- given all the different rules that we seek -- as come up in Europe, I thought that actually that would be the last region to begin to adopt AI. And it seems, at least from our personal experience so far, that, that might not be the case. We see Europe as, actually, the next big kind of region outside of Asia for us to move into. There is a lot of interest in that area. And we think we'll be able to have some sort of a client in the -- particularly in the retail industry in Europe towards the end of the year, early first quarter next year.

Great. Then (inaudible) transition, so it looks like you guys used like $14 million or $15 million of cash in the quarter. I know you called out a number of things. I'm curious how much of that was used for proof-of-concept with KanKan? And then I know in the July filing, it said you had tapped I think $5 million of the Aspire line. I'm curious as it stands right now, how much of the Aspire line you've actually tapped? And what kind of rough cash balance is currently?

So Darren, I'll answer the kind of the big picture answer on that side. The proof-of-concept work -- the pipeline that we have right now is massive. And as you know, any proof of concept -- as we're going through testing in -- requires capital. So what it's shown going into September, it's [been] 2 weeks away, is that the interest that we're now getting is clearly not even in the -- just in the verticals that we have been focusing on. And these are very large-scale opportunities that we've found during the testing that our AI models are working very well. So a big -- I would say a strong portion of that number going on forward will all be used more towards the POC deployment.

Okay. And then just any update on kind of how much of the Aspire line you tapped?

$5 million.

We -- yes, only -- yes, $5 million.

Okay. so it hasn't changed since the July...

No.

Okay. And next is, just last one for me, I think on the last earnings call, if I'm not mistaken, you just talked about asset monetization. I know you shared, it's probably out of your control. But can you just talk about any update there? I know you talked about trailing ticket platform multiples. I'm just kind of curious about asset monetization and if VDC is a potential opportunity in terms of turning that into cash as opposed to running it as an operating entity?

Yes. So I would say in general the different assets that we have, haven't been, I guess, valued or mark-to-market with what is existing in the public and other -- the deposit market and other public companies. Obviously, as a fiduciary, we need to explore any credible interest in any of the different businesses. But until we see something very solid, we're not ready to comment on that yet.

(Operator Instructions)

(technical difficulty)

Can you guys hear me?

Yes.

Quick question about KanKan deployments for food and safety and/or retail. Given the breakdown for Q2, it doesn't appear we've deployed anything in Q2. Have any begun in July?

Well, the -- [George] , the deployment, as you can imagine, are not -- the different type of deals that we've signed with our clients are multi-faceted, okay? So it's not just doing, for example, a simple case of tying facial recognition with the membership database, it's much more than that. So until we begin to finish all the different aspects of it, that's when you begin to see it in the numbers.

Right, okay. So I mean are you expecting some deployments of retail and/or food safety this fiscal year?

Yes, absolutely. And as I mentioned, we are already starting our prototype store with Lotus -- with C.P. Lotus in September. And there are, I think, a number of follow-on opportunities after that.

Right. In prior earnings calls, in prepared remarks, big numbers of locations have been offered in terms of commitments. Is that still valid for this year? Or does that span multiple years?

I would say that would span multiple quarters. We're very -- we're certainly very excited for the -- until the end of the second half, or the third and fourth quarter this year, and I think as we continue to have success on that leading to next year as well.

Okay, all right. Okay, guys. And one final question. You guys are confident to meet your -- the debt that's due -- that's coming by the end of September, I think it is -- is it end of September? Or...

End of September, yes. Yes, we are.

And that concludes today's question-and-answer session. Mr. Shao-Kin Tao (sic) [Kai-Shing Tao], at this time, I will turn it back over to you.

Thank you for taking the time and your interest in Remark. And if you have any questions, please contact Alison or myself. Thank you.

And that includes today's conference. Thank you for your participation. You may now disconnect.