Remark Holdings, Inc.
Q4 2018 Earnings Call Transcript

Published: 2 Apr 2019

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Remark Holdings Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Keith, and I'll be your operator this afternoon. Joining us for today's presentation are Remark Holding's 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 and uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Any forward-looking statements reflect Remark Holdings current views, and Remark Holdings expressly disclaims any obligation to update or revise any forward-looking statements after the date hereof. This disclaimer is only a summary of Remark Holdings statutory forward-looking statements disclaimer, which is included in full in its filings with the SEC. Also, please note that the Company uses financial measures not in accordance with Generally Accepted Accounting Principles commonly known as GAAP, to monitor the financial performance and 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 the 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 go ahead.

[Kai-Shing Tao:]

Thank you, operator. Good afternoon everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the fourth quarter and full year ended December 31, 2018. We are pleased with our fourth quarter topline performance of $22.3 million, which compares to $18.6 million in last year's fourth quarter. Our results exclude an additional $4.6 million from KanKan, which was delivered but revenue recognition has been deferred. Overall, our performance was in line with the preliminary revenues we announced in January. Both of our business segments closed the final quarter of the year on a strong note. As we announced two weeks ago, we have entered into an agreement to sell Vegas.com to VDC-MGG Holdings, an affiliate of our senior lending group. This transaction favorably positions us to significantly reduce our debt, restructure our balance sheet, and streamline our cost structure as we transform Remark into a pure AI focused Company. We will now dedicate all of our attention to strategically expanding our AI business globally. To reflect this expansion globally and the breadth of our AI solutions to corporate businesses and governments, KanKan AI will be rebranded to Remark AI. This transformation puts us in a vastly improved position to secure strategic and financial partnership with key players across multiple sectors spanning retail, manufacturing, agriculture, public safety, and security. The Remark AI platform supports highly tailored yet easy to install AI solutions, aimed at solving specific problems, reducing risk and delivering positive outcomes across multiple industry. As we make ongoing progress in deploying our products and scaling our business, we expect to build a stream of recurring revenues supported by modest recurring capital costs and operating leverage. Although the sales cycles in the business-to-business and business-to-government are comparatively longer, the size and long timeline of these contracts make it more than worthwhile and thus so highly coveted. We are in the midst of a very strong pipeline of deals that are in testing, proof-of-concept stage, and/or contract stage in retail, food, manufacturing, construction, and agriculture, which we believe will support strong growth in 2019 and beyond, Remark AI in retail. AI is now emerging as a vital component of the next stage of the mass market retail, supermarket and restaurant industry. We view McDonald's widely covered $300 million acquisition last week of the AI startup, Dynamic Yield, as somewhat of a bellwether for the industry. Major mass market brands that touch millions of consumers everyday recognize the need to improve their ability to utilize data in a way that improves their personal connection to each consumer creating more sales opportunities, driving conversion, and increasing efficiency. McDonald's CEO, Steve Easterbrook said it best

[Alison Davidson:]

Thank you, Shing, and good afternoon everyone. Turning to our financial results for the fourth quarter ended December 31, 2018, our revenue for the fourth quarter of 2018 was $22.3 million compared to $18.6 million last year. The increase was driven by $4 million increase in revenues resulting from transaction growth in the Travel and Entertainment segment. Our Technology and Data Intelligence segment contributed $2.4 million revenues from the deployment of our AI based retail and safety solution, a further $4.6 million was delivered for our AI-based safety and risk management solutions but the revenue recognition will be deferred until such time as we collect the amounts due from the customer. We anticipate collections to begin in the second quarter of 2019. Turning to our expenses, our total cost and expense for the fourth quarter of 2018 was $32.4 million compared to $40 million last year, driven in part by a reduction in impairment charges to $2.2 million $14.6 million in 2017, which included recognize losses at $5.8 million and $8.8 million, an impairment of long-lived intangible assets and goodwill respectively, which were acquired through the CBG acquisition. During the fourth quarter of 2018, we also recorded a 600,000 impairment of the remaining long-lived intangible asset expired in the CBG acquisitions and a $1.6 million impairment of goodwill for the sale of substantially all the remaining assets at Banks.com. Our cost and expense for the fourth quarter of 2018 also included a $4.7 million increase in cost of revenue in the Technology and Data Intelligence segment to deliver on fourth quarter projects, and a $1.5 million increase in paid-search costs in the Travel & Entertainment segment resulting from the competitive nature of the paid-search marketplace. Offsetting these increases, it was a $2 million decrease in employee stock compensation. Our operating loss was $10.1 million for the fourth quarter of 2018 compared to an operating loss of $21.4 million in the fourth quarter of last year, due to a reduction in total cost and expense. Our net loss for the fourth quarter of 2018 was $7.1 million, or negative $0.19 per diluted share, compared to a net loss of $89.2 million or negative $3.47 per diluted share in the fourth quarter of last year. The net loss for the fourth quarter of 2018 included a non-cash gain of $5.7 million related to a change in the fair value of our warrant, which occurred due to the decrease in our stock price during the period. The same period of 2017 included a non-cash loss of $66.5 million related to a change in the fair value of our warrant liability which resulted from an increase in our stock price during that period. Additionally, we reclassified certain amounts in our December 31, 2017 consolidated statements of operations and comprehensive loss to conform to the current presentation as of December 31, 2018. Specifically, we have changed how we present operating expense to better reflect the activities that generate such expense. For comparability, we have provided a comparison of 2018 results to 2017 results by quarter at our website www.remarkholdings.com. Stockholder's deficit as of December 31, 2017 nor net loss or cash flows for the year ended December 31, 2017 changed because of the reclassification. Now turning to our balance sheet, our cash balance is $14.4 million with an additional $11.1 million of restricted cash bringing our combined cash position to $25.5 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 and Entertainment business. On March, 2019, we announced our agreement to sell Vegas.com to VDC-MGG Holdings LLC, an affiliate of our senior lending group, for an anticipated enterprise value of approximately $45 million. The cash proceeds of the transaction will be used to pay amounts due to our senior lenders, leaving only approximately $10 million of remaining debt owed to the senior lenders. The transaction remains subject to certain closing conditions including approval of the transaction by our stockholders, we will hold a special meeting of stockholders to obtain t stockholder approval for the transaction. The closing of the transaction is expected to take place during the second quarter of 2019. As part of an agreement to sell Vegas.com, our lenders have agreed to forbear from taking enforcement actions against us to up to June 4, 2019. Also in connection with our agreement to sell Vegas.com, we are in discussions with our lenders regarding our amendment with the financing agreement anticipated to be entered into at the closing of the Vegas.com sale transaction. I'll now turn the call over the operator for the Q&A session. Operator, please go ahead.

[Operator:]

[Operator Instructions] We'll take our first question from Darren Aftahi from ROTH Capital Partners. Please go ahead.

[Darren Aftahi:]

First, just to get clarity on the Data Intelligence, I understand you referred $4.6 million of revenue collected in the second quarter, can you help us understand on that $4.7 million on the cost of revenue for KanKan. What is actually in that number? Are there all the costs that are borne with that additional $4.6 million in revenue, and then are there additional like POC costs where there's not revenue related to that yet?

[Alison Davidson:]

So everything that is included in the cost of revenue is related directly to a project -- related directly to a contract. And what's included in cost of revenue does include the costs related to the $4.6 million of revenue that's been deferred into the second quarter.

[Darren Aftahi:]

Shing, I think when you were at our conference, you had talked about strength across agriculture, smart city, and in retail. I guess with Q1 basically done and as we look at kind of the first half of the year, you know, where are you most excited kind of if you do duplicated, I guess, one, in terms of the pipeline of verticals, and then two where you actually think they'll see real revenue materialize over the first 90 days to 180 days of 2019?

[Kai-Shing Tao:]

Darren just to clarify, when you say real revenue what do you mean by that?

[Darren Aftahi:]

I mean, so the first part is, where are you most excited about pipeline and then the second would be where you actually will be recognizing revenue from those contracts, so it's more of a sort of the near term and intermediate term kind of view?

[Kai-Shing Tao:]

Yeah, so I think pretty much all across the board, and clearly the AI for the solution that we provide an AI for retail and smart city right now seem to have the most of our momentum and certainly followed by that is on the agricultural side as I mentioned on the call with the African swine disease, it's a major -- it's a major crisis level right now that's happening in China. So, we have begun or and/or are about to begin across all these different projects, I would say typically after we finish our particular contract we look to collect the revenue shortly after. Collect the cash shortly after.

[Darren Aftahi:]

Got it. And then the three kind of contracts you called out, I think they are the U.S. shopping mall, there's a fast food company with a couple of thousand locations, particularly in the U.S., sort of a large European/ U.S. retailer. Are those clients that are prospects or are they paid pilots, do you have signed contracts with them, just more color or clarity would be helpful.

[Kai-Shing Tao:]

Yeah. We have passed the – I’d say for the most part, we are either in the final stages of testing or past the testing part, and we're in the contract stage right now.

[Darren Aftahi:]

And then on Sharecare, can you just indulge us a little bit more, I think at our conference you said you know, more to come. So maybe as it pertains to just capital on the balance sheet, so one, the proxy had some commentary about additional parties interested in Vegas.com and any kind of update there? And then two, as it pertains to Sharecare, how do we think about kind of monetizing [indiscernible] for the next six to 12 months? Thanks.

[Kai-Shing Tao:]

Yeah, so as it relates to VDC, we can't comment on the additional bidders. I think with the transaction value that's been given out there, there's been a number of different groups that have a process that thought that perhaps in their own ecosystems, you know the value could be higher. So, we'll see more to be as soon as there’s something that's actually a formal and finalized then that's what we'll give an update on that side. As it relates to Sharecare, I think you know that is something that we've been talking about for several years. The business right now is doing very well, and it's always in strategic conversations, not really with the financial investors, but really more with the strategic partners on how they could get their kind of how fingerprints to be moved in a fast way across the U.S. So they've been in discussions, we're always in discussions, and you know I'd see something that's going to happen something in the very near future.

[Darren Aftahi:]

And then just last one. Did you guys use [indiscernible] raising money in the fourth quarter?

[Alison Davidson:]

In the fourth quarter? No.

[Kai-Shing Tao:]

No. We did not.

[Operator:]

And we will pause a moment. And at this time I'd like to turn our conference back to management for any additional or closing remarks.

[Kai-Shing Tao:]

No. We look forward to keep in touch with you on our next quarter's call. Any questions, please reach out to Alison and myself or going to our website at www.remarkholdings.com. Thanks.

[Operator:]

Ladies and gentlemen, this concludes today's discussion. We appreciate your participation.