Remark Holdings Inc (MARK) 2018 Q3 法說會逐字稿

Ladies and gentlemen, good afternoon. Welcome to Remark Holdings' Third Quarter 2018 Earnings Conference Call. My name is Abby, and I will be your operator this afternoon.

Joining us for today's presentation 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, 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 statement 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 Shing Tao. Please proceed, sir.

Thank you, operator. Good morning, everyone, from Macau, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the third quarter ended September 30, 2018.

Our third quarter revenue was flat compared to a year ago. Revenue growth from Vegas.com was offset by declines in the Technology & Data Intelligence segment, resulting from regulatory changes in China, impacting our FinTech business. Third quarter revenues from Vegas.com was $17.6 million, up 8% over last year as ticket volume and traffic conversion increased 9% and 28%.

I'm proud of what the team has accomplished with Vegas.com. Over the past 2 years, we have significantly elevated the website's profile and performance through our efforts to improve the user experience, expand our product offerings and grow our advertising and affiliate revenue streams. Vegas.com has become a premier destination site that consistently attracts a growing audience that increasingly utilize the site to purchase show tickets and hotel rooms.

Given our projected net revenue forecast for Vegas.com in 2018, it's clear the value of the site is not reflected in our share price, especially considering the strength of recent ticketing and event management transactions in the private markets as well as the successful IPO of Eventbrite, which IPO-ed at 10x revenue.

Now moving to KanKan. Revenue for third quarter was $1 million, down from the same period last year, primarily due to the continued impact of the reduction of activity in China's lending market, caused by the industry-wide regulatory audit. Despite the near-term impact of the regulatory audit on our FinTech business, we're more optimistic than ever regarding the future of our broader AI initiatives and remain on plan in executing our strategy and rolling out our portfolio of AI solutions and products.

Given the size and breadth of the AI contracts we've secured and our deployment efforts underway, we're well positioned to accelerate our revenue growth in the months ahead. With KanKan, 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's platform supports the development and launch of very accessible, customizable and easy-to-install AI solutions at reasonable price points for our clients. In turn, we expect to benefit from recurring revenue streams and low capital cost as we scale our install base.

As more of KanKan's contracts are moving to the deployment stage from the proof-of-concept stage, we would begin to gradually record both upfront fees and ongoing licensing fees with each contract having different fee arrangements based on the products deployed.

Now let me discuss our progress in executing against several contracts during the third quarter, beginning with our retail business. We're continuing to actively work with our clients to lay the groundwork to deploy our AI products in a range of retail locations, including fresh food stores, supermarkets, convenience stores and super grand malls.

During the quarter, we recorded $0.6 million in revenue from our retail business as we deployed KanKan's retail AI solution in 2 C.P. Group affiliate flagship stores. At the store, KanKan AI is being used to provide significant improvement in user shopping experiences, customer relationships and marketing platform with deeper insights of the customers and operational analytic capabilities. This store in particular is 200,000 square feet with tens of thousands of SKUs and thousands of daily visitors.

The success of the product at these stores illustrates KanKan's ability to handle a very information-rich environment. The C.P. affiliate is pleased with the results we are demonstrating and sees new opportunities to integrate KanKan deeper into their operations and expand into more stores.

KanKan's deployment at the flagship stores is creating strong momentum for our retail solutions, both through C.P. and our solutions for other partners, including with our Smart Eyes for retail product and we expect revenue from our retail business to ramp in the coming months.

Our next biggest near-term opportunity is in the public safety and surveillance market where we're continuing to work with our clients to develop and install solutions that will be used in construction sites, campuses, restaurants and traffic monitoring and enforcement.

During the quarter, we continued to test and deploy our construction site monitoring product with our construction business partner. At these sites, KanKan's safety AI solution is being used for workforce management and safety process enforcements. KanKan is helping to make these sites more efficient and safer by logging attendance, verifying safety policy complying, preventing smoking and fires and ensuring machines are being operated correctly. The feedback from our construction business partner has been positive, and we expect our product will soon commence installment at hundreds of sites.

Finally, with regard to our FinTech business, as I mentioned, the performance of our lending industry product was impacted by the recent shutdown of China's lending market due to the industry-wide regulatory audit. We have started to see signs that liquidity in the lending market was beginning to loosen during the third quarter, but activity has remained far below normal.

The regulatory audit has significantly changed the FinTech landscape in China. Over the past few months, the number of peer-to-peer lenders has dwindled from more than 5,000 to 1,500 today. And some predict that this number will continue to fall over the next 12 months to fewer than 100 lenders.

With the compression in the market, several competitors in the FinTech space have decided to aggressively chase revenue opportunities at the expense of profitability to grab market share. Instead of recklessly chasing growth in a much smaller and uncertain market, we've chosen to be much more selective in our approach, especially since KanKan is such a original platform with huge applications across many industries.

Given our premier banking client list and proven ability to help our clients identify low-risk banking customers, we continue to believe there will be opportunities to utilize our AI in the financial sector. We will continue to actively explore the best paths for monetization of our IP and proven solutions.

Finally, we continue to build out our technology and scale our team. KanKan is based with strong -- is backed with strong intellectual property and patents and a deep pipeline of future patents. Our team consists of outstanding developers and we are being advised by leading machine learning experts. We are developing industry-leading solutions and are being recognized for our work.

During the quarter, KanKan received the top ranking at the Innovation and Entrepreneurship Competition in Sichuan, China, and the team has advanced to the national finals, which will be held this month. The competition is the largest, highest profile and most influential entrepreneurship competition in China with over 30,000 total participants and only 200 participants advancing to the national finals.

We also were selected for the second consecutive year to not only present at, but to speak at, the 5th World Internet Conference, sponsored by the Cyber Administration of China and Zhejiang Provincial People's government. The conference is the largest and highest level Internet conference held in China and is a summit for the world's leading Internet companies.

In summary, we're continuing to execute our KanKan deployment strategy and we're laying the groundwork to take full advantage of the emerging opportunities in front of us. We remain on track in executing our multiple agreements as we work with our blue-chip clients to install our AI technology across multiple sectors in China and Southeast Asia.

Given our ability to rapidly deploy our technology and deliver highly accurate and actionable results, we're confident that our revenue will accelerate in the months ahead. At the same time, considering our board has a fiduciary responsibility to maximize shareholder value and due to the large AI growth opportunity that we see for the company, we are actively evaluating strategic alternatives, including the potential sale of certain noncore assets, investment assets and operating businesses and we are considering acquisitions that would provide additional revenue.

We feel strongly that we have strong assets that, if monetized, would provide significant cash levels that could potentially be used to eliminate debt, fund growth or buy back shares. And we are obligated to review any proposals that may benefit our shareholders.

And now I'd like to hand the call over to Alison, who will walk us through the financial results for the third quarter.

Thank you, Shing, and good afternoon, everyone. Turning to our financial results for the quarter ended September 30, 2018. Our revenue for the third quarter of 2018 was $19.4 million, essentially flat compared to last year. A $1.3 million growth in revenues in the Travel & Entertainment segment from increased transactions and a $0.6 million revenue increase in the Technology & Data Intelligence segment where we recognized revenue from the deployment of our AI-based retail solutions was offset by $1.8 million decrease in revenue from the FinTech business due to regulatory changes in China.

Turning to our expenses, our total cost and expense for the third quarter of 2018 was $25.8 million compared to $25.4 million last year. Among the largest drivers of the change in cost were $0.8 million increase in paid-search costs for the Travel & Entertainment segment resulting from the competitive nature of the paid-search marketplace and a $1 million increase in payroll-related costs and deployment costs for the Technology & Data Intelligence segment. These increases were partially offset by a $1.4 million decrease in cost of revenue for the Technology & Data Intelligence segment primarily as a result of the regulatory changes in China.

Our operating loss was $6.4 million for the third quarter of 2018 compared to an operating loss of $5.9 million in the third quarter of last year due to the increase in total cost and expense.

Our net loss for the third quarter of 2018 was $3.8 million or $0.11 per diluted share. This compares to a net loss of $13.3 million or $0.58 per diluted share in Q3 of last year. The net loss for the third quarter of 2018 included a $3.5 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. The same period of 2017 included a $6 million noncash loss related to a change in the fair value of our warrant liability, which occurred due to the increase in our stock price during the period.

Now turning to our balance sheet. Our cash balance is $9.9 million with an additional $11.7 million of restricted cash, bringing our combined cash position to $21.6 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 September 28, 2018, we failed to make the $11.5 million payment required by our financing agreement, which constitutes an event of default. As a result of the default, we have classified the debt as current on our balance sheet. We are actively engaged in discussions with the lenders regarding a resolution of the default. In connection with those discussions, we have agreed to increase the amount of exit fees payable to the lender by $1 million.

Also, in connection with those discussions, the lender has informed us that they are willing to forbear from taking any enforcement actions against us through the end of the year, if we continue to pursue certain strategic alternatives. We intend to pursue those strategic alternatives and others, including the potential sale of certain noncore assets, investment assets and operating businesses. We do not plan to make any further statements about the strategic review process until a decision has been made.

Shifting gears to our financial outlook for 2018. Adjusting for the impact of the changes taking place in the FinTech market, we are fine-tuning our outlook. We now expect consolidated revenue of approximately $75 million to $80 million in 2018 and $19 million to $23 million in the fourth quarter. The low end of the range for our fourth quarter forecast includes nominal contributions from our Technology & Data Intelligence segment.

Overall, we remain on plan in executing on our strategy in rolling out our portfolio of AI solutions in conjunction with our clients in the retail and workplace and public safety sectors. Our previous 2018 revenue guidance included the projected contribution from these combined initiatives based on the company's internal model, which has not changed. However, the timing of the revenue contribution from these initiatives has been pushed out. Given the substantial agreements that we have and the actual deployments that are taking place, we believe that Remark remains well positioned to accelerate its revenue growth in the months ahead.

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

(Operator Instructions) And we will take our first question from Darren Aftahi with Roth Capital Partners.

First on your revised guidance, can you indulge me, what portion of that is entertainment? I know at the beginning of the year, you talked about $65 million to $75 million of entertainment revenue, so it sort of implies the AI business is $5 million to $10 million, is my thinking correct there? And then there's some commentary in the release about the scope of some of your AI-related deals have expanded, which is kind of impacting 4Q revenue. Could you expand a little bit there? And then, I didn't quite catch this, but the cash burn in the quarter, just trying to understand 2 things. One, how much did you take down from Aspire and then what was the gross cash burn? And then as it pertains to your strategic initiatives, have you already begun this process? And if so, when?

Okay, well, I can take the first part of that with the revised guidance. And looking at the revised numbers, we're expecting the Travel & Entertainment segment to be about $68 million of that. But KanKan should be -- or Technology should be between $6 million and $10 million and the remaining contribution coming from corporate and other media properties. As far as the Aspire takedown, there was an additional $5 million that was taken from Aspire in August. Regarding the AI opportunities, I'll let Shing speak to that.

Yes, hi, Darren. So I think we've probably spoken about this, but I think I'm just going to reiterate that a lot of the different deals that we're dealing with, the contracts that we've signed are with very large customers. So as AI is new for a lot of these guys, the first time that they ask us to begin contracts with them is maybe over like 1 or 2 or 3 different things. And as we've gone through the process, they have expanded the scope of the business. We're not like a cable company where you can just flip the switch and just add the service right on. So we have to take our time because as we are scaling the technology across a wide base of stores, this has to be done properly. And again, we only have one shot at this. So when we say we push things out, it's to make sure that we're able to take on the expanded scope, but do it profitably. And if that doesn't fall within the kind of the quarter cutoff, that's not something that we can kind of push, but we mostly [posit] that we need to do it this way.

Got it. And then just in terms of the timing on the strategic alternatives, I know you'd engaged an adviser. I'm just kind of curious, is this process kind of already underway? And any kind of insight into that would be helpful.

Yes, I mean, the process has been started. We've been receiving offers throughout -- it wasn't just a recent thing. We've been receiving offers through the entire year. And as our -- as it's now gone to a point where we received multiple inquiries, that is our kind of goal to see what are the possibilities and then see -- of a proper transaction. So that process has been on the way for a couple of months. And if there is something that we would come to agree, this would happen sometime over the next few weeks -- not few weeks, but over the next -- till the end of the year.

And Darren, just to clarify. The total draw on the Aspire line during the quarter was $10 million. $5 million we'd already talked about in the last earnings release, that was in July and then an additional $5 million in August for a total of $10 million for the quarter.

(Operator Instructions) And we will take our next question from George Kafkarkou, who is a private investor.

Are there plans to make Alison a permanent CFO? What's the thinking behind that guys, please?

Yes, when Alison took on Doug's role, we came to agreement that we work together through the end of the year and kind of look through things and that's something that we'll come to some type of an agreement, I'm sure, in the next couple months.

Okay. It sounds like the deployment of KanKan in retail and surveillance and safety, it sounds like it's become more involved, if I understood the call properly because customers generally want to do more than was planned. Is my understanding accurate to that?

Yes, that's very accurate.

Okay. So that makes the predictability more difficult. But how confident are you in the predictability going forward in the next few months because the press release, as I read it, was that the term of reference was in the coming months, we'll see a significant increase in KanKan deployment and presumably revenue?

Yes, I think that's pretty important. I mean, this is not -- these contracts in deployment that we have been working on, these are things that we've been working on over the last, let's say, 3 to 5 months and -- or 3 to 6 months. And there are a lot of things that are involved. And so I don't think no one ever said that this part was easy. So there are a lot of factors to consider and -- but most importantly that we need to do this right. And as I said, it's -- I don't think -- there are very few companies out there in our space that have been able to sign contracts with companies of the size that we have signed in there. Therefore, there is a lot of trust in us in showing the proper way to install and obviously showing them the right ROI. So these are all things that -- these are all the things that we're making sure that we're taking the time to get it done right.

Okay, a final question. Have you guys thought, therefore, about the kind of guidance you will give for the next fiscal year for KanKan?

No. I mean, I think what I'm able to say is that coming into last year, that is being able to understand how fast the other side wants to believe, right? And so while the contract says one thing, the information from their side to be able to not only get top level to kind of sign on, is also getting the operating guys to be able to implement it. So I think it's very hard to give the proper guidance for next year. I think it's more important to see the different contracts that we have signed in terms of with these different groups, whether it's with in the construction industry, whether it's with the -- in the telecom or even retail industry in seeing that the wide base of stores that they have and understanding that there is a fee, an annual fee that's associated with each one across a wide base will allow us to at least understand what the size of the opportunity. And as often these close, once you get the first number of stores done, then it becomes a much faster process.

Our next question is from John Grimley with TWJ Capital.

Shing, just want to touch base on the adviser you retained and just a reminder of what the assets are. I know you're having a percentage of Sharecare. Can you just remind us what percentage you currently own? And then I'm just trying to get a sense for, how big -- how much money you could bring in by any type of transaction and whether it'd be enough to pay down the debt and kind of solidify the balance sheet to grow the business, the KanKan business.

Yes. So I mean, the numbers that I'm going to be throwing out are all ones that I think if you're to go on the Internet, you can find and get a pretty good idea of what the comps are. As it relates to your question on -- so Rain is helping us, it's helping us on all the -- as a strategic overview. But as it relates to Sharecare, if you look at what are the businesses out there, they have traded anywhere from 4 to 10x revenue and we own roughly 4.5% of Sharecare, I believe. And I think that if that was to be the case, even on the low end, I think that would bode very well for us -- for Remark. And so I think and as I also mentioned during -- in the prepared remarks regarding Vegas.com, you see what the public multiples are for a company like Eventbrite, which is a company that has built a large scale, but is using money and they are trading at 10x revenue. Private companies of similar business model are trading at 5 to 6x revenue, not saying that we will get what that is -- what those multiples are, but I'm saying even at a discount, it would certainly be very -- it would be a big positive for the company.

And I thought I heard you say that there were multiple interested parties in some of those assets. Did you say that, or am I hearing that?

Yes, you're right. I just said multiple in there.

Okay. And I guess, what's plan B? It seems like you're on good enough terms with your lender that they're going to wait for you till year-end. I guess is that for getting something done before year-end? Or as long as you're showing progress, will they kind of play ball? Or how are those conversations going?

I mean, I think as long as we're showing progress with any of these kinds of conversations, then I think that our lenders will, as they have been over the last couple of years, work as partners in growing this company.

And we have no further questions at this time. So I would like to turn the call back to Mr. Shing Tao for any additional or closing remarks.

Thank you for taking time to participate on the call. If any questions, please feel free to reach out to myself or Alison. Thank you.

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.