Remark Holdings, Inc. (NASDAQ:MARK) Q2 2023 Earnings Call Transcript

Remark Holdings, Inc. (NASDAQ:MARK) Q2 2023 Earnings Call Transcript August 14, 2023

Operator: Good day and welcome to the Remark Holdings Fiscal Second Quarter 2023 Financial Results Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. Please note that this event is being recorded. I would like to turn the call over to Ms. Fay Tian, Investor Relations. Please go ahead.

Fay Tian: Thank you, Nick. Good afternoon, everyone, and welcome to Remark Holdings second quarter fiscal 2023 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 and Mr. Todd Brown, Vice President of Finance. In just a moment, Mr. Tao will provide an update on our businesses, and Mr. Brown will recap our second quarter 2023 fiscal results. 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 information on Remark’s businesses and recent developments. Please go ahead, Shing.

Kai-Shing Tao: Thank you for taking the time to listen to our Q2 update and we’re excited to share what lies ahead of us. But first, a recap of Q2, which was revenue that was strongly driven by our business in China, despite the current economic and political headwinds that China is facing. First, the construction sector, in Q2 2023, we’ve completed 25 Remark AI construction product deployments, which contributed over $2 million. The deployments are for smart construction platform, which includes worker check-in and check-out, worker PPE monitoring, worker safety enforcement, hazard zone intrusion prevention, fire and smoke alerts, environmental protection monitoring. We continue to develop construction SOP and autonomous operation related AI algorithms and applications, which will include autonomous crane operation system and autonomous cement mixing system.

Two, school sector, in Q2 ’23, we continue our Remark AI school product development and deployment. We’ve added 43 schools in our customer base in Q2, which makes our AI school products to serve over 700 schools and 1.5 million students. Our school safety, food safety and AI energy controlling system, along with new products released in Q2, which include eye protection and restroom environment monitoring system are making us a unique AI product provider in the school education market. We are now expanding our footprint into two new provinces in China and into the city of Chongqing, which is one of the four principal municipalities of China. To-date, our systems cover less than 1% of the total of 400,000 campuses in China. Three, smart community, we completed the entire deployment of our smart community projects.

Over 1800 communities deployed in which we do that in conjunction with China Mobile for Phase 1. We are in the process of negotiating additional smart community project Phase 2, which will cover an additional 3000 residential communities and over 5 million residents. Phase 2 is expected to start in Q3, Q4 of this year. Four, airline sector, as we mentioned before on our calls Remark AI has introduced the first AI aviation platform in the industry. We are currently in the final bidding process for three of the airline AI projects after the delay due to COVID from 2022. The projects include airport safety system, engine inspection system and airplane collision prevention system. To remind you of the use cases here. Typically it takes one hour plus for ten workers to inspect the engine to make sure there are no burns or cracks in the blade.

With our computer vision AI, we are now able to do this inspection under ten minutes and with only one inspector. And lastly, in the retail sector, we are currently working with one of the largest ice cream and pizza chains in China and have deployed our AI smart retail products to over 600 stores. The products include staff check-in and check-out and performance analysis, food processing safety, theft prevention for food material waste management, product presentation and placement and loss of sales prevention, replenishment management and etcetera. We are expecting an additional 600 more chain stores to be online by the end of Q1 ’24. Going beyond China, during the last two conference calls, we have shared with you the large total addressable markets otherwise known as TAM, Remark Holdings is seeking to capture.

To recap, there are currently approximately 100 million cameras in the United States and another 200 million globally excluding Greater China. Our mission is to utilize our award winning AI powered technology to bring intelligence to the 300 million [indiscernible] cameras that are in the marketplace outside China, providing detailed analytics such as identity recognition, large density, people counting, loitering, object detection, weapons detection through our SSP otherwise known as our Smart Safety Platform that is camera and platform agnostic. Modeling a $100 per month analytic fee per video stream or $1,200 annually, that reflects an annual total addressable market of 3.6 billion in recurring revenue globally, excluding Greater China. With such a large TAM, how are we going to capture this market opportunity?

We have been in discussions actively with sales and marketing partnerships with technology, market share, leaders that have wide distribution and a vested interest in participating in the rapid growth implementation of AI technology. It’s not a secret that the competition is very intense for market share out there and these large companies want to fund the best partners to help them rapidly advance their AI business. While Remark AI’s platform is broadening its capabilities, what we have uniquely distinguished ourselves is in the specific AI area of computer vision. Our focus is on making industrial applications run more efficiently as that is a large scale business that is moving rapidly to and is what customers are paying for now. As we deepen our relationship and partnerships, it is very clear that we are one of the leaders in this area and we are well positioned to further our lead in this race.

We also recently announced our partnership in working with global leaders with both Nvidia and Intel. We have optimized our AI computer technology with each respective company’s latest chip, which now allows us to jointly market our computer vision technology to their customer bases, utilizing their 5000 plus sales force or trained to help sell our smart safety platform. The collaboration with Intel does not stop within the US as we are actively partnering to deliver the SSP to their Latin American customers that complement our existing system integrator relationships. With Intel, we will be initially working with them in retail and quick service restaurant space with both understanding how their customers shop and eat on the front end and then working with their food and customer safety and security on the back end.

This is exciting for us as we first work with Intel a couple of years ago in launching a kitchen safety platform in China and have now jointly upgraded our offering globally. Each group will be initially focused on different areas. Some may overlap, but in general it’s a divide and conquer strategy. Our partnership with Nvidia through its metropolis ecosystem was recently acknowledged by Nvidia Program Manager, David Gregory, who recognized our team’s successful working relationship in establishing a strong foothold in the smart city space. This includes traffic control and providing meaningful analytics and data insights to cities, stadiums and major events. We are now also working with the largest global software company and the largest EV manufacturer in the world to train their product and sales people on Remark’s Smart Safety Platform and how they can help their end customers joy, an immediate return on investment by providing real-time analytical data that helps to understand their customer preferences as well as augmenting their security teams monitoring capabilities with AI tools to prevent disruptive incidents.

This operating leverage gained from our partner’s existing distribution channels changes the playing field and allows us to scale quickly. During the quarter, we announced a partnership with one of the best companies in the people counting space called WaitTime. We expect to share sales resources with them as they have very established sales channels with Cisco and Intel has made a strong entry here in the US, selling their people counting products. Our strategy is to piggyback their sales team and relationships to help expand their offerings to their customers. As you know, once we win this, many similar opportunities will present themselves after we win. As a point of reference, these deals are all seven-figure opportunities with a combination of both hardware and software, which ultimately means high-margin business for Remark AI.

To provide another example, previously, we’ve disclosed our relationship with the Barclays arena, where we are integrating our AI analytics with their existing Genentech video management system to help provide area arena security, monitor crowd density as well as extend coverage for the exterior square attached to the public transit station. Our software partner has direct relationships with 150 sports teams in the NBA, NFL, NHL, MLB, MLS as well as over 200 stadiums in arena, speeding up the sales conversations with decision-makers as we leverage our future placement in their platform marketplace as a preferred supplier resold directly by their sales force. More importantly, the credibility from this partnership provides an indirect technology stamp of approval for most corporate IT departments, which are already running on their operating systems.

Recently, we are in discussions with the world’s largest EV manufacturer for them to bring EV transport buses and school buses to Nevada. Given Remark’s extensive expertise in AI-powered video analytics and our proven track record of developing fast and effective innovative solutions, we are well positioned to have our suite of SSP products to outfit the EV bus to provide functions such as people counting, violence detection and driver monitoring. The federal government through the Federal Transit Administration, FTA will be funding ACCESS 2050, which is focused on improving the transportation system through the US, the number one of the top five priorities of this plan is safety. Safety is what Remark’s products are built to provide as we have now shown through our deployments around the world.

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This includes here in Fremont Street Las Vegas to Brazil with the Police Departments and two, the UK with order and traffic control. Our capabilities drive meaningful change, foster efficiency and contribute to the realization of ACCESS 2050’s overarching mission solidifying our role as a front runner in the pursuit of the $3.74 billion that is allocated for improving safety from the ACCESS 2050 overall spend. As you may recall in our last earnings, I noted about the opportunity for us to work with one of the largest providers of school buses in the US using our AI safety security technology. We’re able to make progress in those discussions and with this opportunity in Nevada will only significantly enhance the opportunity. In addition, we are partnering with large global systems integrators with deep industry relationships who already sell and service the end market that we are seeking to capture.

One example of this partnership is with [indiscernible] working with them to outfit the Rio de Janeiro police car fleet with mobile facial and license plate recognition capabilities as police officers patrol the city looking for wanted persons or vehicles. In a short period of time, we were able to customize our technology offerings for the Brazil market and subsequently win. While this is just the initial phase, it showcased our ability to move fast and make the requirements of our customers, and we’re confident you will see many opportunities like this in Latin America in the second half of the year. One of the key advantages to Remark AI is the speed we are able to move in the versatility of our Remark AI platform. Recently, we are presented with a very small window of opportunity to present our platform to address the 911, 311 call center problems that cities around the US are facing.

Our competitors thought we would be unable to customize our AI, however, in the short time frame, we were able to do so. We built a platform that was unique and embrace the latest AI technology to help address the issues that city was facing. Many of you know the WaitTimes for 311 or 911 are very long. A key reason for that is the lack of dispatchers. Remark AI’s 311 platform and simultaneously service 20 sessions in 40 different languages. With the average 311 session costing $3.50 per session and as high as $7 in some major cities, Remark AI’s platform immediately delivers cost savings and a return on investments for its urban customers, while increasing the speed and breadth of services through a wider audience. Our platform combines the best in generative AI and computer vision AI.

When a caller dial 311, our AI agent will speak to them to help understand this situation. Simultaneously as they are speaking, our AI agent fills out the necessary paperwork to document this call. Lastly, if they say a picture is worth a thousand words, the caller would take a picture of video to showcase the situation and our computer vision AI would better understand and independently verify the nature of the call. This solution was unique and very was well received by our listeners. We are confident that after we win this opportunity, similar opportunities will present itself not only in other cities, but in any other — in any business that deals with forms and paperwork and obviously as well as anything to do with customer service like airports and restaurants.

On a final note, we would like to begin letting you know about the new market, which will be a Q3, Q4 story is Remark AI entering the Middle East, in particular with Saudi Arabia. As it appears this is a special opportunity to take part in the rapid transformation of the Saudi’s economy and national infrastructure. Unless you’ve been hiding under a rock, Saudi is spending hundreds of billions of dollars to transform the economy into one that is not reliant solely on oil. We have been approached by several groups that are involved in this transformation, who want our expertise in handling large-scale construction projects like in China and bring it back to the Kingdom of Saudi Arabia. We are very excited about the opportunity as it is unprecedented.

And also, we are confident we are one of the very few that can provide such solutions. These include managing a workforce that will grow from a current number of 50,000 workers to 400,000 workers by the end of the year, using AI and LiDAR jointly for construction planning or having construction run 24/7 autonomously and in the dark to save power. This is a once-in-a-lifetime opportunity for Remark and we intend to open an office sometime in 2023 in Riyadh to handle these opportunities. In conclusion, I’d like to emphasize that our business model is built upon annual multiyear recurring subscription revenue that provides a total turnkey AI-powered platform for our customers and partners. Our technology has been proven by our partners and clients to be robust and flexible at the same time.

As we set a solid footing into the various markets we have mentioned, our continuous focus is on the mutual goals of positive cash flow generation and growth and believe that this quarter has set us on the trajectory to reach our goals by the end of the fiscal year.

Todd Brown: All right. Thank you, Shing, and thank you to everybody for joining us on today’s call. As we noted when we last spoke to you during the first quarter earnings call, we expected that our project completions in China would begin to accelerate in the second quarter and they have. Though China’s former zero-COVID policy had been adversely affecting our business in China and such policies lingering effects as well as COVID infections continued during the first quarter of 2023, we were able to ramp up our work with vendors and customers during the 2023 second quarter to complete many more projects than we did in the first quarter of ’23 and even more projects than we did in the 2022 second quarter. The increase in project completions led to revenue for the 2023 second quarter totaling $3.2 million, reflecting a 24% increase from the $2.6 million earned during the same quarter in 2022.

The revenue in Q2 is almost entirely related to our smart construction project under which we were able to complete installations of 25 more sites and our smart campus solutions, which we were able to deploy it an additional 43 educational campuses in China, bringing total installations to more than 700 campuses and helping to protect more than 1.5 million students. With revenue and cost of revenue increasing by about the same amount during the 2023 second quarter compared to the same period of 2022, gross profit remained essentially unchanged at approximately $0.7 million. Our operating loss also remained essentially unchanged at $4 million. Though operating loss did not change, we did experience a $0.7 million decrease in general and administrative expense that resulted from a $0.5 million reduction in stock-based compensation and a $0.4 million decrease in business development expense.

Those decreases in G&A expense were partially offset because we recorded a total of $0.4 million of asset impairments in the 2023 second quarter compared to having no impairments in the same quarter of 2022. Increases in sales and marketing expense and technology and development expense also partially offset the decrease in G&A. Net loss totaled $5.9 million or $0.42 per basic and diluted share in the 2023 second quarter compared to a net loss of $12.5 million or $1.19 per basic and diluted share in the same quarter of 2022. Since operating loss was unchanged, the decrease in net loss was primarily the result of the 2022 second quarter including $6.9 million of loss on an investment that did not recur in the 2023 second quarter. Also, a decrease in interest expense because significantly less debt principal was outstanding during the 2023 second quarter and during the same period of the prior year was offset by an increase in finance costs related to the obligations to issue our common stock that resulted from our transactions with Ionic Ventures LLC.

On April 12th of 2023, we issued the second of two debentures to Ionic Ventures pursuant to the debenture purchase agreement that we and Ionic signed on March 14th, 2023, and we received $1 million pursuant to such debenture We also received an advance of $2 million during the 2023 second quarter pursuant to the equity line of credit with Ionic Ventures that was established in October of 2022. The convertible debentures we issued in March and April of 2023 plus the advance pursuant to the equity line of credit during the 2023 second quarter give rise to obligations to issue our common stock and, in turn, caused the increase in finance costs. As of June 30th, 2023, we were obligated to issue an estimated 5,711,148 shares of our common stock to Ionic, representing an obligation with an estimated aggregate fair value of 5.6 million.

As of June 30th, 2023, we still owed an aggregate total of $16.3 million to our lenders, an amount which currently must be repaid by October 31st, 2023. We continue to have ongoing conversations with our lenders regarding that outstanding debt and are confident that we will reach a positive solution that is beneficial to all stakeholders. Also as of June 30th, 2023, our cash balance totaled $0.2 million compared to a cash balance of $0.1 million at December 31st, 2022. Net cash used in operating activities was $5.2 million for the six months ended June 30th, 2023, representing a 53% decrease compared to the $11.1 million we used in operating activities during the same period of 2022. And with that, I will turn the call over to the operator to begin the question-and-answer portion of the call.

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Q&A Session

Operator: Thank you and I’ll begin the question-and-answer session. [Operator Instructions] Thank you. The first question will be from Steve Wagner of Integrity Wealth Advisors. Please go ahead.

Stephen Wagner: Hey, guys. Thanks for taking my call. I just — we are hearing so much about AI — and I’ve had some — I read – actually I read a really good book on it called the Spatial Web. And I’m learning that there — everyone’s doing generative AI, but it seems like that’s a commodity. Is that what you’re doing? Is there any difference between what you’re doing than what everybody else is doing in this regard with the computer vision?

Kai-Shing Tao: I would — thanks, Steve. I think within AI and certainly generated AI with what we’re seeing with ChatGPT has definitely garnered the attraction. Where we focus on is computer vision. We feel that’s a much bigger market that’s where customers are paying. And I really believe the value that AI brings us in the industrial applications. So we’ve been — we have our own large language model. We — actually, that was what we — one of our first ventures in AI, and I think those back in 2017, 2018. So we’ve actually been able to update our model and been able to use that with some of our customers. But as a stand-alone business, is very difficult. It’s very difficult to get customers to pay for it. And so that’s why we had pivoted almost six or seven years ago.

And we’re glad that we do that. You can see once ChatGPT released the product. Very quickly, there were a lot of other companies that introduced their language model. So the barriers to entry is not very high. For what we do we think the barriers to entry are very high because it’s not just the — it’s not just coming up with the technology, but it’s the ability to deploy it as well. The implementation is not so simple.

Stephen Wagner: Sure. As you look across the spectrum of AI outside of the magnificent seven, it seems like there’s been just a gigantic fair market sell-off in market valuations. I mean what do you see in private wise private valuations on AI? And what — I mean, how would you measure where Remark should be given what you guys are doing and seem to be really enthusiastic over?

Kai-Shing Tao: Yes. I mean it’s obviously frustrating where our share price is and where our valuation is. But I think this is a this is not a sprint. It’s certainly a long-distance race. And so, yes, it’s — I think you see a lot of private companies right now that are raising monies with — in the several hundred million dollar valuations with less than $2 million of revenue. I just don’t think that’s sustainable. I feel that where there are companies that are incredibly overvalued in terms of their metrics where we obviously feel we’re very undervalued. We have a technology that we built from the ground up. We’ve got a blue chip customers around the world, and we’re generating real numbers without taking huge losses to get there.

And we feel we’re on track to breakeven this year, which I think will be the first for any AI company doing these kinds of numbers. So it is — inevitably, it is a distraction when you read it in the press but when it comes down to actual execution, I like where we are — what path we’re going down.

Stephen Wagner: Okay. In terms of headcount, I mean where are you guys now that way? I mean — and do you see — obviously, as you get these contracts, there may be more of a need for capital? Or do you think that will be offset by upfront deposits or revenue. And I would like you to expand on that because I think one of the things we shareholders are kind of looking at is we understand that you’ve been hearing about the revenue. And obviously, it’s great to see some money coming in from the China side of things. But like bringing on a domestic customer, is there any upfront revenue? How is that going to work?