MARK - Remark Holdings Inc.'s (MARK) CEO Kai-Shing Tao on Q2 2022 Results - Earnings Call Transcript

Remark Holdings, Inc. (MARK)

Q2 2022 Earnings Conference Call

August 15, 2022 4:30 P.M. ET

Company Participants

Fay Tian - Vice President of Investor Relations

Kai-Shing Tao - Chairman and Chief Executive Officer

Robert Gatchell - Chief Safety and Security Officer

Todd Brown - Vice President of Finance

Conference Call Participants

Presentation

Operator

Good day, and welcome to the Remark Holdings Second Quarter 2022 Financial Results Conference Call. Today's conference is being recorded.

At this time, I like to turn the conference over to Fay Tian. Please go ahead.

Fay Tian

Thank you, Justin. Good afternoon everyone, and welcome to Remark Holdings fiscal second quarter 2022 financial results conference call. I'm 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; Mr. Todd Brown, Remark's Vice President of Finance; and Mr. Robert Gatchell, Chief Safety and Security Officer.

In just a moment, Mr. Tao will provide an update on our businesses and Mr. Brown will recap our second quarter financial results and we will have Mr. Gatchell to talk about why he joined Remark and what are the exciting business opportunities with our technologies. Following those remarks, we’ll open the call to questions.

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 color on Remark's businesses and recent developments. Shing?

Kai-Shing Tao

Thank you for taking the time to join our 2022 second quarter earnings call. In-light of the severe zero-COVID policy in China, we played defense and laid the groundwork for when the country opens up. Similar to the gaming industry in Macau where it operates under similar conditions, we believe this was the most prudent course of action.

Having said that, we were still able to build our business where the lockdown was not absolute. We have continued to grow our AI business. in servicing the educational school systems, smart communities, and in smart construction.

Starting off with the school systems, we have installed in more than 60 more schools in quarter two, totaling approximately 500 campuses since the launch of our smart school system and expect to see even more growth in this field as the country opens up again.

Just recently, according to China's government policy of educational evaluation reform our AI platform was rated one of the leading management platforms for student growth and development, providing a rich set of scenario based software and IoT tools for education administrations, schools and families to assemble comprehensive student process data and profile from learning skills, sporting skills, aesthetic skills, etcetera, which could support the overall healthy growth of students. This new product has now been installed in more than 100 schools and helping over 100,000 students daily.

Moving to smart communities. In Q2, we completed the deployment of 73 residents communities, which brings us to close to 900 communities across China and over 3.5 million people daily. We are optimistically expecting the rest of 2,000 residents communities to start as soon as the lockdowns are lifted in 2022.

One key point here is that while not only is the revenue generated from these projects important, it equally is important to highlight the number of people that will soon have our AI platform in the hands of their daily lives. With our smart construction platform, we started to fulfill additional contracts on construction projects in Q2.

Our smart construction solution completed installations at 14 construction sites, bringing total installations to 67 sites, while 30 plus installations are still being completed. The key highlight here is that we expect to see our revenue grow on a per customer basis. When we first started in the construction industry, our customers will look to us to provide 3 to 5 solutions.

We are now seeing demand to increase that to 10 solutions. This is important as it shows our solutions and brand is spreading in the industry and we are now able to upsell our customers to subscribe to additional services. Our China Mobile and Smart Banking had continued to struggle this past quarter, due to the lockdowns as the branches were simply not open.

As the country begins to open up, we are looking for Q4 for that date. We expect a fairly rapid catch up as these [CDs] [ph] need to catch up with each other. We mentioned on our last quarter's call on Remark building the first AI Aviation platform. After completing a proof-of-concept trial with one of the largest airlines in the world, we expect to close our first deal with the airline in the third quarter of 2022.

We are providing a commercial airplane turbine blade inspection system using our computer vision technologies to drastically improve the inspection, the efficiency, and reduce the costs. Our AI based system assists airline engineers with identifying potential turbine blade damage and helps them determine the severity of damage identified while conducting the inspection.

The system is flexible enough to allow inspections to be conducted with the plane at the gate or in the hanger, while the system speed, precision, and highly accurate damage detection ability, all but eliminate the chance a missing damage that the human eye could miss and reduce the inspection duration from hours to minutes. This is a great case study on how we are able to take successful live use cases and bring it to the other parts of the world like the U.S. and the UK.

These solutions are to run businesses more efficiently and safer and applicable globally, which is why I'd like to use this call to highlight our businesses in the U.S. and the UK that we are looking forward to. The U.S. has always been the world leader in AI research and development, where it lagged the world was the adoption of AI, but over the last two years with COVID, AI is the only way to address the issue of how to grow the revenue while lowering costs.

In addition, it is well documented about the difficulties in hiring good employees. Again, the only solution is AI. Going into the third quarter of 2022, we are seeing two main drivers in the U.S. The Biden infrastructure build that was passed earlier this year will begin its once in a generation disbursements to fix America's infrastructure.

And second, not a day goes by where we see senseless violent acts as it is a normal daily occurrence. What's worse is that these offenders are able to get away and victims are unable to get the justice that they deserve. Going into the third quarter, we not only built a revenue model that is achievable, but more importantly one that is accepted by our U.S. and UK customers.

While it is still premature to discuss specific customers, we can say that we are currently working in the U.S. to finalize paid pilot projects with several potential customers, including the Transportation Systems and police forces of two of the largest cities in the U.S., a Top 10 sports and entertainment arena that attracts more than 2 million annual visitors and which is located in a large city.

A leading airport, a leading international airport, as well as the municipal agencies responsible for monitoring local parks and public areas in a large city. For two of the described pilot projects, we have already been notified that we've won the business. And in the coming weeks, we look forward to sharing with you the names of the customers we are working with, once final details are worked out and the official contracts are signed.

So, what is our revenue model and why are we so confident we can achieve it? We've been working for several years to develop cutting edge AI algorithms that serve as the basis for AI Solutions that address the needs for many businesses and industries. Our research team, based in the U.K. have spent the past two years building a robust computer vision based AI analytic software tool set we call the smart safety platform, otherwise known as the SSP. Along with an equally robust Smart Sentry unit that works hand-in-hand with the SSP.

We are on the cusp of seeing that work and the work of the rest of our team pay off. As we now begin to expand our sales into the United States and the UK under the brand Remark Vision. Our new Remark Vision business targets the massive safety and security market. In the United States alone, it is estimated that about 100 million cameras are currently installed. Most of which are dumb cameras that only provide video feeds for manual analysis with no help from AI.

To provide some perspective, if we were to capture only 12,500 of the estimated 100 million camera video feeds described, we estimate that will result in a monthly revenue to us totaling $2 million. We believe our business model is simple and is priced to provide value to our customers.

Current estimates include a typical security professional monitoring security feed earns 65,000 a year in salary and benefits per year and a business or government entity that would need to employ three persons to cover each 24-hour shift, resulting in an annual cost of approximately $200,000.

By utilizing our SSP to monitor 10 video streams would cost that business or government entity approximately 50,000 annually saving that customer approximately 75%, while augmenting the existing staff's monitoring capabilities and potentially relieving some security personnel of monitoring duties to be able to respond to incidents as necessary.

We are using a monthly licensing based recurring revenue model for sales of our SSP, allowing for recurring revenue streams going forward. Sales of the Smart Sentry units, servers and associated hardware will also be part of the mix. In addition to the monthly license fee per camera stream, customers purchase an AI server and pay an incremental monthly management fee for each group of 50 camera video streams being monitored.

Beginning with the third Q, we plan to disclose the number of monthly video streams where channels broadcasted as a metric to track the progress of our smart safety platform deployment. We expected to start disclosing the number of installs of Smart Sentry units beginning in the first quarter of 2023.

Our SSP, which utilizes a customer's existing camera and video feed infrastructure, in most cases, provides a robust set of AI powered features that augment a human operator's ability to monitor video feeds and determine a response to potentially dangerous, illegal, and or unusual situations. For example, among other features, the SSP can detect fair avoidance on a subway.

Recognize that an unintended object is in a location it should not be in. Provide an accurate count of the persons in settings where large groups are gathered, monitor crowds, and recognize potentially violent conduct, detect fire and smoke, detect if a person has fallen down, and detect behaviors such as vandalism and progress, [trash-casting and/or loitering] [ph]. In all such cases, the SSP provides timely alerts to security personal allowing for quick decisions and a rapid response to incidents.

We are also offering our Smart Sentry unit for sale in the third quarter of this year. Each Smart Century can be purchased or leased on either a monthly basis or per event basis. We can configure each Smart Sentry customers to deploy at a fixed location or to use for mobile deployment and each unit allows for visual distance coverage as much as one half mile, while providing thermal vision capabilities allowing for deployment in low light or nighttime scenarios.

Our SSP monitors the video footage provided by each Smart Sentry. Common usage scenarios include enforcement of public park operating hours, as well as provision of safety and security at sporting events, concerts, festivals, and any other large gatherings of people that require visual and analytical support for the security staff.

In the United Kingdom, we are currently partnering with one of the Top 3 systems integrators. specializing in large rail and transportation projects in the UK, as well as pursuing regulatory and compliance enforcement business on behalf of local municipalities, which want to provide – which want to prevent public nuisances such as littering.

The systems integrator is currently leading a trial for our SSP on our behalf and we expect a successful paid deployment to begin during the first quarter of 2023. Meanwhile, our successful pilot project for the municipalities in the first half of 2022 has led to recognized revenue beginning in the third quarter of this year. This involves helping municipalities detect and enforce the prevention of illegal dumping’s of garbage and other forms of rubbish, which prior to the adoption of the Remark AI solution caused over $15 million annually to the communities Remark is serving.

The littering and the legal dumping problem known as fly-tipping in the UK has become a huge concern to the UK government and has caused the national government over $500,000 million. Local authorities have handled over 1.13 million incidents during the pandemic from 2020 to 2021, up 16% from the previous year causing great alarm. With such an alarming figure, the Department of Environment, Food, and Rural Affairs otherwise known as DEFRA is stepping up with a plan to crack down on fly-tipping.

Like any other borough in the UK, Buckinghamshire Council has suffered from the increasing number of fly-tipping for some years, including various waste items such as gardening soil, building concretes, mattresses, chemicals, discarded house contents, furniture, electrical appliances, and miscellaneous builder waste.

The majority of fly-tipping hotspots are found on motorway sides with few pedestrians, [indiscernible] alleyways, quiet green space areas, near garage blocks, and on housing estates community bin areas where overflow issues exist. These issues not only cause a serious impact on the local environment quality, but are also associated with criminal danger to local residents because the top end of the scale of the legal dumps is operated by professional, criminal gangs.

Remark engaged with our U.K. camera manufacturer partner, Videosoft Global to supply fly-tipping and anti-social behavior detection systems to local authorities to make our societies more safe and more ecofriendly places to live. Our award winning video, analytic model enables existing CCTV cameras installed around the city to become smart enough to detect abnormal objects, covering a wide range of object types, traveling baggage, rubbish bin bags, carboard boxes, furniture, and even abnormal potential [indiscernible] not seen before to verify by council's human operators.

Moreover, the target object left attended is linked back with the abandoned pedestrian or vehicle. With Remark’s advanced AIOT software, a platform, the SSP such information can be used to perform metasearch across cameras around the city to trace back the track where the suspected criminals are coming from before the event. We're escaping following the event and [were our latest capture] [ph].

As the year progresses during the trial period, the system shows the capacity to detect the fly-tipping in the pilot areas, reducing the need for costly and time consuming human monitoring. Video AI technologies allow local authority officers to crack down on fly-tipping efficiency and to take action quickly at a new level. [Indiscernible] said this fresh attempt to crack down on fly-tipping to save customers up to [10 pounds] [ph] per individual item.

We are proud to participate in this project to fulfill our mission of using our AI Technology to help make an ecofriendly living world and enable a sustainable future. A lot of you have been patient investors over the last seven years. Many of you I've spoken with personally and clearly understand the frustration you have shown as the stock market – as the stock market price has reflected the volatility of a new transformational technology being introduced to the market such as artificial intelligence.

While clearly we have not – we could have not avoided major pandemics such as COVID, which has affected the growth and rollout of technology among the retail stores in China over the past two years, what has remained consistent is the successful adoption of our technologies over our well-funded private venture backed competitors. As a public company, we are subject to quarterly review and guidance, which our private competitors do not face.

To put things in perspective, our closest [private domestic] [ph] is comparable, anti-vision has raised over $345 million of capital, while generating $11 million in 2021 and 2022 and carrying a recent Series C valuation of US$1 billion. Meanwhile, public AI SaaS companies, which are considered blue chip companies like C3 are expected to lose over $80 million this year in order to generate $200 million of revenue.

We have always said that generational technology waves follow a 7 to 10 year development and adoption cycle. First, it was the adoption of the Internet, then the adoption of mobile, and then into the cloud. The common denominator is that when it happens, it happens quickly. We have first laid the technological groundwork and more importantly now have laid commercial customer foundation as well.

We began our AI product development in 2012 and begun generating revenue in Asia beginning in 2018 as they were early adopters. We are now ready to fully deploy the smart safety platform software solution for the United States and the UK European markets. To make Remark vision a success, our first step was to hire a highly talented and exceedingly qualified team to launch and grow the business.

We've worked closely with Robert Gatchell when he was the Director of Safety and Security for Brightline, our high speed rail customer from Florida. Brightline is the first modern high speed railway train connecting first from Miami to West Palm Beach and now Orlando, expecting to open by 2023. We've learned much about each other and from each other and as Robert carefully performed due diligence on Remark AI solutions and we both quickly realized that there was a cultural fit and a technological fit between us.

After 18 months, we successfully convinced Robert to join the Remark team and build out Remark Vision and its SSP and Smart Sentry products. As a Director of Safety and Security, Robert Gatchell led Brightline’s system wide initiatives to ensure employee, guests, [station] [ph] and facility safety and security, oversaw the development and implementation of the Crisis Management Plan and work closely with all government and first responder entities, and furtherance of the organization's safety and security objectives.

In 2016, he became the first Brightline employee to oversee and run the safety and security mission for Brightline. And as a result, he developed, created, and drove the vision of all safety and security matters, including emergency preparedness. Utilizing emerging technology, he also designed and implemented the only passenger in bag security operation in the U.S. that screens every person in bag before boarding the system while at Brightline.

Mr. Gatchell brings more than 20 years of experience of law enforcement and security, most of that time working with specialized roles focused on Homeland Security, Safety and Emergency Management. Before joining Brightline in August of 2016, Mr. Gatchell was in law enforcement as a sergeant for the New Jersey Transit Police and served for eight years as the Emergency Management Coordinator for New Jersey Transit, which is the third largest public transportation agency in the U.S.

Mr. Gatchell was appointed in April 2019 to serve on the newly created Surface Transportation Security Advisory Committee. Currently serving in that role, representing Remark Holdings. The STSAC advises the United States TSA Administrator and provides recommendations on service transportation security matters, including developing, refining, and implementing policies, programs, initiatives, room makings and security directors. And most recently, he was appointed co-Chairperson of the Emergency Management and [Resiliency Subcommittee] [ph] under the STSAC.

With that, I will introduce Robert Gatchell, who elected to lead a successful executive career at our customer Brightline and instead build a technology platform in business with Remark. To share his vision about the team, he is leading on behalf of a Remark Vision to capture the once in a generation opportunity powered by our technology. Robert?

Robert Gatchell

Thank you, Shing, and good afternoon to those that have joined. As you have heard, my background has been primarily in law enforcement and service transportation. Through my experiences in New Jersey and in Florida, I've been able to take advantage of opportunities that have brought me to the doorstep of this great company. I was amazed by Remark's willingness to share ideas and work a solution that pertain to the overall safety of the railroad.

Foresight and solutions that Remark has successfully produced far exceeds what I've seen through the years. In my previous roles, I've always looked for ways technology can enhance the overall safety and security in the operation. With that understanding, we can successfully fill a void that currently exists across a wide range of disciplines. Utilization of my expertise with an extensive network of global partners be a key driver.

We'd be able to leverage the right configuration of people, processes, and of course, our technologies that are suited to mitigate and continuously monitor security risk and safety concerns ultimately enabling the client to prepare for, respond to and recover more efficiently.

My main focus over the next several months will be the cultivation of our brand around people, process, and technology for risk-based solutions. In an unpredictable world, especially as we have seen over the past few years, risk comes in many forms. The ability to protect people, assets and reputation, while managing risk is critical for any organization. I've often heard and truly believe that effective security and business continuity practices are both a competitive differentiator and a business enabler.

They ensure customers, employees, facilities and supply chains are safe and reliable. The investment and resilience today means protection and cost avoidance in the future. The focus will be on helping clients and communities build that resilience through an extensive understanding of their assets, risks, and vulnerabilities, all of which we will be able to do through the contacts and communications that we will have with the people of the team that we've been building.

All of which can be achieved, as I mentioned before, by our technology and other resources, we will provide through our risk based solutions platform. I'm extremely honored and excited to be a part of this team. I look forward to meeting our efforts. Thank you for your time today.

And now, I'll let Todd Brown, Vice President of Finance to present financial results for the second quarter of 2022.

Todd Brown

Great. [Actually presented] [ph] for us. As we discussed earlier, we spent the last couple of years preparing our products and our business for launch in the United States and the UK with the rest of Europe to follow. In the meantime, the teams in China working for the VIEs known as the variable interest entities, we consolidate work hard to overcome continued lockdown, related to the COVID outbreaks to increase revenue from China during the second quarter of 2022 by about 1 million, compared to what we recorded in the same period of the prior year.

The lockdowns prevented VIE teams from getting to the construction sites on which we plan to install our solutions, and also kept those teams away from some school campuses on which we were trying to install. As a result, the amount of the increase in the revenue was less than we expected to record. Projects completed when the lockdowns were less of a factor, included the continued deployment of smart banking systems, smart campus deployment at schools, as well as construction projects.

Including U.S. business, total revenue for the second quarter of 2022 was 2.6 million, down from 4.4 million during the second quarter of 2021. The increase in revenue from China was offset by a decrease of approximately 2.5 million in our revenue from our U.S. businesses. In the second quarter of 2021, we completed in an AI data intelligence services project for a daily fantasy sports client.

We did not complete any similar projects in the second quarter of 2022 due to a daily fantasy sports industry-wide slowdown in marketing spend and a focus on profitability leading to a 2.3 million decrease in revenue from the U.S. Gross profit decreased by approximately 1.1 million Q-over-Q to 0.7 million during the second quarter of 2022, primarily as a result of the decrease in revenue from the AI data intelligence services project completed in 2021.

The overall gross margin for the second quarter of 2022 was 27.8%, compared to 43.9% in the same period in 2021. The company incurred an operating loss of 4 million in the second quarter of 2022, compared to the operating loss of 2.5 million in the comparable quarter of 2021. Besides the decrease in gross profit, increases of 0.5 million each in share based compensation expense and business development expense, partially offset by a 0.7 million decrease in consulting expense were the primarily contributors to the increase in operating loss.

Net loss totaled $12.5 million or $0.12 per diluted share in the second quarter ended June 30, 2022, compared to a net loss of $1.6 million or $0.02 per diluted share in the same period of 2021. On June 30, 2022, the cash balance totaled $1.1 million, compared to a cash balance of $14.2 million on December 31, 2021. Net cash used in operating activities totaled $11.1 million during the six months ended June 30, 2022.

We recently filed an 8-K regarding modification of our debt agreement following the extension of the maturity date until October 31, 2022 with a potential additional extension until November 30, 2022, should we repay at least $5 million of principal prior to October 31, 2022. We are currently evaluating refinancing options with close investors and other structured debt holders who will appreciate the robust product cycle we are about to enter.

Thank you again for taking the time to listen to our future. We will also be posting our whitepapers that go into depth to AI platform that we have built. I'm confident that is worth the time to read and digest and you will like what you see. Talk to you soon.

Fay Tian

Okay. With that, I'll turn the call back to the operator and we'll now open the conference call to questions. We encourage callers with questions to queue up with the operator, as soon as possible so that there will be minimal lag time between each caller. Operator, could you please instruct the callers how to queue up with their questions? Thank you.

Question-and-Answer Session

Operator

Fay Tian

Great. Thank you, Justin, and thank you, everyone, for participating in Remark Holdings second quarter 2022 financial results conference call. A replay will be available in approximately four hours through the same link issued on our August 1 press release. Have a good evening.

Operator

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent afternoon.

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Remark Holdings, Inc.'s (MARK) CEO Kai-Shing Tao on Q2 2022 Results - Earnings Call Transcript