Remark Holdings, Inc. (NASDAQ:MARK) Q3 2018 Earnings Conference Call November 14, 2018 4:30 PM ET
Kai-Shing Tao - Chairman & Chief Executive Officer
Alison Davidson - interim Chief Financial Officer
Darren Aftahi - ROTH Capital Partners
John Grimley - TJW Capital
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 morning. 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, 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 this 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 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 the Chairman and CEO, Shing Tao. Please proceed, sir.
Thank you, operator. Good morning 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 and Data Intelligence segments resulting from regulatory changes in China impacting our FinTech business.
Third quarter revenues for Vegas.com was $17.6 million, up 8% over last year as ticket volume and traffic conversion increased 9% and 28%. I am proud of what the team has accomplished with Vegas.com.
Over the past two 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 the growing audience. They’ve increasingly utilized 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 concerning the strength of this in ticketing and event management transactions in the private market, as well as the successful IPO of Eventbrite which IPOed at 10 times revenue.
Now, moving to FinTech. Revenues for the 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 of a FinTech business, we are more optimistic than ever regarding the future of our broader AI initiative and remain on plan in executing our strategy and rolling out our portfolio of AI solutions and processes.
Given the size and breadth of the AI contracts we secured, and our deployment efforts underway, we are well-positioned to accelerate our revenue growth in the months ahead. With KanKan, our primary goal is to professionally 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 supports the development and launch of very accessible, customizable, but 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 costs 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 will begin to gradually report both upfront fees and ongoing licensing fees with each contract has a different key arrangement based on the product deployed.
Now, let me discuss our progress in executing against several contracts during the third quarter, beginning with our retail business. We are continuing to actively work with our clients to lay the ground works to deploy our AI products in a range of retail locations including fresh food stores, supermarkets, convenient stores and super brand malls.
During the quarter, we recorded $0.6 million in revenue from our retail business as we deployed KanKan’s real AI solutions in two CP Group affiliate flagship stores. At this store, KanKan AI is being used to provide significant improvements in user shopping experiences, customer relationships and marketing platform with deeper insights of the customers in operational, analytical 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 demonstrates KanKan’s ability to handle a very information-rich environment. The CP affiliate is pleased with the results we are demonstrating and seize new opportunities to integrate KanKan deeper into their operations and expand it to more stores.
KanKan’s deployment at the flagship stores is creating strong momentum for our retail exclusives both with CP 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 are 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 products with our construction business partner. At these sites, KanKan’s safety AI solutions was being used for workforce management and safety process enforcement.
KanKan is helping make these sites more efficient and safer by logging attendance, verifying safety policy compliance, 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 products was impacted by the recent shutdown of China’s lending market due to the industry-wide regulatory audits. We have started to see signs of liquidity in the lending market was beginning to loosen during the third quarter but activity has remained far below normal.
The regulatory audit has a difficult change to FinTech landscape in China. Over the past few months, the number of peer-to-peer lenders has dwindled from more than 5000 to 1500 today. And some project that this number would continue to fall over the next twelve months fewer than a 100 lenders.
With the compression in the market, our competitors in the FinTech space has 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 have chosen to be much more selective in our approach, especially since KanKan is such original platform with huge applications across many industries.
Given our premier banking clientele 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 and we will continue to actively explore the best path for monetization of our IP and proven solutions.
Finally, we continued to build out our technology and scale IT. KanKan is based with strong – is backed with strong intellectual properties and a deep pipeline of future package. 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 into a national final which will be held this month. The competition is the largest highest profile and most influential entrepreneurship competitions 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 as 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 are continuing to execute our KanKan’s deployment strategy and we are laying the ground in order to take full advantage of the emerging opportunity in front of us. We remain on track in executing on 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, we deliver high accurate and actionable results. We are 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 non-core assets, investment assets and operating businesses and we are considering acquisitions that would provide additional revenue.
We feel strongly that we have strong access that if monetized will provide significant cash levels that could potentially be used to eliminate debt, fund growth or buyback shares and we will obviously review any proposals that may benefit our shareholders.
And now I’d like to hand the call over to Allison for a walk up 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 net revenue for the third quarter of 2018 was $19.4 million essentially flat compared to last year, a $1.3 million growth in revenue from the Travel and Entertainment segment from increased transactions and a $0.6 million revenue increase in the Technology and Data Intelligence segment where we recognized revenue from the deployment of our AI-based retail solutions was offset by a $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 cost for the Travel and 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 and Data Intelligence segment.
These increases were partially offset by a $1.4 million decrease in cost of revenue for the Technology and Data Intelligence segment, primarily as a result of the regulatory changes in China. Our operating loss was $6.4mln 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 non-cash 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 non-cash 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 and 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 if they are willing to forebear 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 non-core 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 and Data Intelligence segment.
Overall, we remain on plan in executing on our strategy and 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 concluded the projected contribution from these combined initiatives based on the company’s internal model which is 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. Please go ahead.
Hi, thanks for taking my questions. First, on your revised guidance. Can you indulge me, what portion of that is Entertainment? I know at the beginning of the year, we talked about $65 million to $75 million of Entertainment revenue. So that sort of applies to add business is 5 to 10. Is my thinking correct there?
And then, there is some commentary on the release about the scope of some of your AI-related deal that 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 the cash burn in the quarter, just trying to understand two 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? Thank you.
Okay, well, I can take the first part of that with the revised guidance and looking at the revised numbers, we are expecting the Travel and Entertainment segments to be about $68 million of that. With KanKan to be or Technology to be between 6 and 10 and the remaining contribution coming from corporate and other media properties.
As far as the Aspire, take down, 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 probably have spoken about this, but I think that I am just going to reiterate that a lot of the different deals that we are dealing with, the contracts that we sign up with very large customers. So, as AI has moved for a lousy size, the first time that they asked us to begin contracts with them as maybe over like one or two or three different things.
And as that will come through the process there is expanded the scope of the business. Now we are not like a cable company where you can just put the switch and just add the service light on so we have to take our time because as we are scaling the technology across a wide base of stores and this has to be done properly.
And again, we don’t have one shot at this. So, when we say, we push things out, it’s to make sure that we are able to take on the expanded scope and do that properly. And if that doesn't fall within the kind of the quarter cut-off is that’s not something that we can kind of push. But we most of the deployments that we do this way.
Got it. And then, just in terms of the signing on the strategic alternatives, I know you are engaging an advisor, kind of curious, is this process kind of already underway? And any kind of insight into that would be helpful. Thanks.
Yes, I mean, the process has been started. We’ve been receiving offers throughout the - there wasn’t a sort of a recent thing. We have been receiving offers through the entire year and as our – now gone to a point where we received multiple enquiries that is out kind of goal to pursue what are the possibilities of a proper transaction.
So, that process has been on a way for a couple of months and it’s something that we had to come to agreement that would happen sometime over the next weeks. And over the next – to the end of the year.
Great. Thank you.
Darren, just a quick point. The total draw on the Aspire line during the quarter was $10 million. $5 million we had already talked about 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] We will take our next question from George Kafkarkou [Ph] who is a Private Investor. Please go ahead.
Thanks for taking my call. Are there plans to make Allison the permanent CFO? What’s the thinking behind that guys please?
Yes, well, Allison well, when Allison took on Doug's role, we came to agreement that we work together through the end of the year kind of look to the things and that’s something that we will come to some type of a agreement I am sure in the next couple months.
It sounds like the deployments of KanKan in retail and surveillance and safety, it sounds like it’s more involved, if I understood the call properly, because, customers generally want to do more than what’s planned. Is my understanding accurate to that?
Yes, to be honest, 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 releases I read it was the term of reference was in the coming months, we will see a significant increase in KanKan deployment and presumably it’s a good revenue.
Yes, I think that’s pretty important. This is not – these contracts and deployment that we have been working on, these are things that we have been working on over the last, let’s say, three to five months and or six months. And there are a lot of things that are involved. And so, I don’t think no one said, no one never said that this part wasn’t easy.
So, there are lot of factors to consider but most importantly, with that you 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 signing it.
So, therefore, there is a lot of trust in us and 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 are making sure that we are taking the time to get it done.
Okay, a final question. Have you guys thought, therefore, about the kind of guidance you will give to next fiscal year for Kankan?
No, I mean, I think, when I make a mistake is that, coming into last year, that is being able to – I didn’t still able to understand how fast the other side wants to believe, right. And so, while the concepts says one things, the information from their side to be able to not only get top level to kind of sign on, there is also getting the operating guys too to implement this. 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 trade letters, we are learning the construction industry, whether it’s in the telecom or in the retail industry, and feeling that the wide based stores that they have and understanding that there is a key – an annual key that associates with each one across a wide base will allow us, that we understand what the size of that opportunity and it’s all because once you get the first number of stores done, then it becomes a much faster process.
Okay. Thank you for taking my call.
Our next question is from John Grimley with TWJ Capital. Please go ahead.
Hey, Shing. Just want to touch base on the advisors you retained and just a reminder of what the assets are, I know you own a percentage of Sharecare. Please remind us what percentage you currently own? And then, I am 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 am going to be throwing out on all ones that, I think is we have to go on the internet, you can kind of get a pretty good idea of what the comps are. As it relates to your question on, so what Raine is helping us, it's helping us on - as a strategic overview, but as it relates to Sharecare, if you look out what are the business that’s out there, they have traded anywhere from 4 to 10 times revenue.
And we own up to 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 go very well for us, for Remark. And so, I think – and as I also mentioned during the prepared remarks regarding Vegas.com, we 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 10 times revenue private companies of similar business models are trading at 5 to 6 times revenue. I am not saying that – that is what those multiples are. But I think 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 and some of those assets. Did you say that, or am I hearing that?
No, you are right.
Okay, and then, so…
You are right, I did say multiple, okay.
Okay. And I guess, what's plan B? It seems like you are on for good enough terms with your lenders, as they are going to wait for these trends. I guess, that’s representing something done before year-end or as long as you are showing progress, will they kind of play bar or how are those conversations going?
I mean, I think, it’s obviously showing progress with any of these kinds of conversations. Then I think that our lenders will – as they has been over the last couple of years work as partners in growing this company.
Got it. Okay. Thanks a lot.
Sure. Thanks, John.
And we have no further questions at this time. So I would like to turn the call back to Mr. Sing Tao for any additional or closing remarks.
Thank you for taking the time to participate on the call. If any questions, please feel free to reach out to myself or Allison. Thank you.
Ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.