Remark Holdings, Inc.

Good day and welcome to the Remark Holdings Fiscal First Quarter 2022 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Fei Tian. Please go ahead.

Thank you, Justin. Good afternoon and welcome to Remark Holdings Fiscal First Quarter 2022 Financial Results Conference Call. I am Fei Tian. Vice President of Investor Relations for Remark. On the call with me this afternoon is Kai-Hsing Tao, Remark's Chairman and Chief Executive Officer, and Todd Brown, Remark's Vice President of Finance. In just a moment, Mr. Tao will provide an update on our business, and Mr. Brown will recap our first quarter financial results. Following those remarks, we will 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 risk, uncertainty, 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 Remarks Holdings' current views and Remark Holdings expressly disclaims any obligation to update or revise any forward-looking statements after the date hereof. This disclaimer is only a summary of Remark Holdings' statutory forward-looking statement disclaimer, which is included in full in its filings with the SEC. 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 business and recent developments.

Great. Thank you for joining Remark Holdings' first quarter call. We're excited by our first quarter results in the start of 2022. As everyone knows, Q1 was challenging for China due to a very strict zero COVID policy. Having said that, we continue to adapt and build upon our existing businesses and grow new ones in the face of these strict lockdowns. Our first quarter results were driven by continued deployment of our smart campus products to 52 more schools in Q1, a 40% revenue growth compared to Q1 of 21. Our new campus products, the AI learning quality evaluation system for students, and AI health condition evaluation system for students launched this past quarter and contributed over $2 million. Overall, our AI campus products are now covered in 500 plus schools, over 1 million students already nationwide. We are aiming to pass the 800 school mark in 2022 and servicing over 2 million students nationwide. Our first quarter results were also driven by our completion of deployment for 189 residence communities, which brings us to close to 800 communities and over 3 million people daily. We are optimistically expecting the rest of the 200 residence communities to start as soon as the lockdowns are lifted in 2022. In the first quarter, we continued the deployment of our smart safety surveillance platform for construction sites, which covers worker check-in, check-out systems, worker PPE monitoring system, smart helmets, pollution monitoring system, fire smoke detection system, falling prevention system, crane safety system, and the construction site surveillance system. By the end of Q1, we have successfully completed 21 more construction projects, with more being deployed and completed in the next few quarters. Obviously, with the lockdown, we are unable to start some projects and finish existing contracts. We expect that process to resume shortly as the lockdown is being lifted. Customers where we will resume our deployment are China Mobile, one of China's largest fast food chains, using our AI platform to improve service quality, kitchen cleanliness, food processing safety, and customer experiences. Due to the lockdown, our installation was suspended after 10 stores, and we will finish the remaining 20 stores as the lockdown is lifted. Third, Bank of China and other banks with large retail operations. Most of the banking branches are still closed, which has slowed us down, but will resume once the lockdown is over. As you can see, our numbers for China will only get stronger as the lockdown is lifted. Having said that, we are continuing to still grow and win new businesses in areas where there are no lockdowns. Now, moving to the U.S. As we said in our last quarter's call, President Biden's $1.7 trillion plan offers a once-in-a-lifetime opportunity where we are well positioned to win the bids due to our leading AI technology and more importantly, technology that has been tested over and over again in real life situations versus the perfect lab environment. Remark AI recently won the security and safety contract for one of the most high profile arenas in the US. Located in one of the largest cities in the US, the arena is ground zero for many of the most high profile sporting and music events. In addition, Given its high-profile nature and placement, they are always under security threats. Our initial phase with them is to focus on outdoor security. Areas our AI will help with are in occupancy counting, loitering, unattended object detection, and gunshot, bomb blasts, and human scream sound detection. We are very excited about this win as our customer views us as a strategic partner and are looking to spread the word about our technology to other arenas and sports teams. The organization has a strong reputation for being at the forefront of technology, and we are excited to win this deal to help them continue to keep that reputation going. Given the rapid rise in crime and shootings in large metropolitan cities, we are in the midst of bidding for several other contracts as it pertains to subway safety. Our Remark AI smart security platform will help reshape crime prevention, investigation, and safety operation. Our smart AI analytic engine monitors multiple cameras in various places, like station platforms, station staff areas, train car, outside the station, and underground maintenance during the night. This will give us alerts on, one, pedestrian behavior recognition, Two, high-level object recognition alert. Three, fire and smoke alerts. And four, restricted area intrusion detection. We have assembled a strong team in preparation for these bids and are confident in our success in winning them due to our technology and experience. Other areas which we are currently focused right now in bidding for in cities are bids related to fire and smoke detections. As you know, there have been many tragic occurrences lately where residential and office buildings have caught fire, and by the time the alerts happened, unfortunately, it was too late. Our remark AI fire and smoke detection will help prevent this happening in the future. We have put forth a comprehensive plan to address the various issues as it relates to intelligent fire and smoke detection, warehouse and store facility detection, our safety, parking lot safety, especially with the onset of electric vehicle charging stations for cars, trucks, and buses, factories, construction sites, arson and other crime prevention, and outdoor large fields. Our police, security, and public safety platform will focus on loitering for pedestrians and vehicles, people counting and crowd detection, behavioral analysis as it pertains to running and falling, an intrusion alert with pedestrians and vehicles. On this call, I'd also like to highlight new areas where we're in the process of building a new growth engine in. First, the aviation industry. Currently, we have signed in our building for one of the largest airlines in the world, the first AI-based digital airplane and airport management system. This is where we will build the AI platform where all new AI-related applications will be built off of. Initially, our four key pieces to this engagement are, one, using our remark AI platform, we will build the foundation for where all future AI models will be trained on and validated to meet the aviation safety and data standards. Two, engine inspection. While the plane is parked, they will use a special camera to check the engine. instead of relying on engineers and the human eye, which often may lead to human error. Remark AI computer vision will help with this process. Three, engine repair. Because each engine generally has over 1,000 parts, it typically takes five days to inspect an engine. Using our computer vision, we can monitor caps and screws are in place and that the pipes are tightened properly. In addition, even though there's a current labor shortage, especially with skilled mechanics, our Remark AI computer vision, coupled with the use of LiDAR and thermal imaging, will help alleviate this pain point and allow 24 hours, seven days a week work through. And lastly, four, autonomous towing cart. Our computer vision will help with potential collision detection. For example, between the two or multiple planes, or if a vehicle is parked underneath the plane, our safety platform will help alert and prevent future incidents. In conclusion, we feel we will be able to take this expertise to other parts of the world. We are already in the testing phase with one of the top three airline companies in the U.S. and expect to begin talks with several of the largest airlines in Europe. Clearly, the needs of the aviation are all the same, And it doesn't matter where you're located, so we are very excited about the prospects in this particular vertical. The second area we'd like to highlight is our remark AI safety platform for Highway Patrol. Again, highway upgrades is a key focus in the bipartisan infrastructure plan. Utilizing our experience in Asia, we will be in the deep process to win the bids for things concerning highway maintenance, and upgrades. Our remarket platform will focus on hazard detection, which is the key area of focus. Hazard detection is broken up into 16 different categories where we are confident in our platform to help address. The categories include weather, as it relates to fog, rain, and ice, traffic hazard detection, as it relates to pedestrian walking, bicycles, illegal parking and dumping, and highway maintenance hazards, For example, being able to identify cracks in the highway. Lastly, in the area of the railway and train station safety, we are in the process of integrating these solutions into our Remark AI smart safety platform. We are building for one of the largest railway systems in the world, a platform system that monitors passengers to not cross the two ends of the platform. The challenge here is that we are meeting is having the ability to discern who is potentially entering the track. Our system needs to identify the difference between the staff, if it's a railway worker, security staff, maintenance, and or cleaning individual versus actual passengers. We are currently in the bid to build this out for 40 train stations and look to finish it in Q3, Q4 of 2022. With our continued partnership with Brightline, we are rapidly moving to increase our presence in the railway industry in the US. Our technology is cutting edge, and the reality is that there are not too many companies out there that have proven to be capable of doing what we're doing. In China, we are currently in the midst of bidding, as I mentioned before, in the midst of bidding for the 40 train stations to use our platform. And we look forward to updating you that over the course of the next few weeks. I'd like to touch upon the graph, our rapidly growing business in Europe and especially in the UK. I briefly mentioned our burgeoning business in the UK on our last quarter call. We are proud to announce our first deal in the UK. Illegal dumping or fly tipping has become a huge concern to the UK government and has cost the government close to $400 million pounds a year, which cannot be ignored. Local authorities handle over 1 million illegal dumping incidents in 2021 during the pandemic, up 16% from the year before. With such an alarming figure, the Department of Environmental, Food, and Rural Affairs, known as DEFRA, is stepping up with a plan to crack down on this. Remark AI won this contract to supply our illegal dumping solutions system as part of the project. Our AI video analytics enabled the cameras to detect illegal dumping behavior and vehicle plate recognition in real time at illegal dumping hotspots. This links the vehicles of the suspects to be disposed of items which allow local authorities to crack down on this. This is just the very first deal that we've concluded and anticipate to win 10 to 15 more deals over the course of 2022 in the UK. We are very excited about what lies ahead. In Q1, we've also finally expanded our augmented reality metaverse business into the US. Using our AI platform to quickly build this for new markets, we took our success with the Winter Olympics in Beijing, and now most recently, brought to Vegas in partnership with MGM Resorts and BTS, the most successful pop group in recent history. Taking a step back to understand what augmented reality is, there is a disconnect between the wealth of digital data available to us and the physical world in which we apply this data. However, currently we can only consume this data in a two-dimensional world of pages and screens. Augmented reality is a set of technology that superimposes digital data and images on the physical world that helps us bridge the gap between the real and digital world by connecting all these data points. While the industry is still in its infancy, spending on AR technology will reach over $30 billion by the end of this year. AR, augmented reality, will affect companies in every industry and many other types of organizations from universities to social enterprises. With our successful launch with MGM Resorts, we've already been approached by numerous companies to create similar experiences in their respective industries, looking to improve productivity, quality, and training. And we expect to announce future new customers on our next call. Our strategic location as a local vendor in Las Vegas allows for a robust pipeline of convention customers who are seeking similar experiences. As you can see, even with the zero COVID lockup, our business is robust right now and clicking on all cylinders. Our China business is strong and will only get stronger as the lockdown is lifted. Just today, Shanghai announced June 1st as the end to the lockdown, and we expect to grow our business faster while everything resumes back to business. In the U.S., we are making tremendous headway and feel we're in the red zone on several large deals in the security and safety space, plus transportation. And finally, rounding it out, our new business efforts in the U.K. have now come to fruition, and we are expecting strong growth there. Our company is well-positioned to capture the organic growth that we have built over the last few years, and most importantly, do it profitably. We are looking forward to our next quarter call to share our results and continued updates to our business.

All right, Jing, thank you. And I will continue with financial highlights for the first quarter. Revenue for the first quarter of 2022 totaled $4.7 million, which was up about 6% from the amount of revenue we recognized in the first quarter of 2021. That first quarter 2022 revenue was driven by a $0.6 million increase in China revenue, with the total revenue of China including $2.2 million from projects in the construction industry and $2.2 million from projects in the education sector, plus an additional $0.2 million from deployments of our smart retail systems in cities that were less affected by the ongoing lockdown. Revenue from the sales of our biosafety products in the U.S. further decreased as we adapted to post-COVID demands and shifted our focus to thermal analytical products, which will provide AI-driven risk management solutions for transportation providers, construction enterprises, and governmental clients. As a result of that change in product focus, we expect longer sales cycles and extended decision-making procedures. Gross profit was $0.4 million for the first quarter of 2022, which was a drop from the $1.7 million we recorded in 2021 in the same period. The overall gross profit margin for the first quarter of 2022 was 8.5%, with increased cost of revenue of $4.3 million primarily being associated with the previously mentioned completions of more projects in the construction, industry, and education sector. We incurred an operating loss of 4.2 million for the first quarter of 2022, which was in comparison to an operating loss of 3.7 million in the comparable quarter of 2021. In addition to the increases in revenue and cost of revenue, G&A expense increased primarily from about $0.5 million of share-based compensation, which resulted from the recognition of a 2020 stock option grant that, for accounting purposes, didn't have a grant date until July of 2021. Also contributing was an increase of $0.3 million in business development expenses as we expand our client base and $0.2 million increase in payroll and benefits. Partially offsetting those increases in cost of revenue in general and administrative expense were decreases in sales and marketing expense as well as in technology and development expense. The sales and marketing expense decreased because the prior year first quarter included approximately $0.6 million that we advanced to our China business partner, and such amounts in that period were classified as marketing expense, but no such activity occurred in the current year. Technology and development expense declined $0.6 million due to reduced reliance on consultants as a result of our acquisition of our UK entity in an immaterial business combination. and also by $0.3 million due to a decrease in the company's liability for China cash bonuses. Our net loss totaled $25.4 million or $0.24 per diluted share in the first quarter compared to a net loss of $5.5 million or $0.06 per diluted share on the quarter ended March 31, 2021. The loss on investment of $19.1 million, which consisted primarily of the change in the fair value of our investment in the common stock of Sharecare, Inc., was almost entirely responsible for the larger net loss in the first quarter of 2022. Another significant contributor to the increase in net loss was interest expense, including amortization of original issue discount and debt issuance costs, which resulted from our $30 million payable loss. that we executed in December 2021, that item bearing a 16.5% interest rate. The same period of the prior year included significantly less debt principal outstanding. On March 31st, 2022, our cash balance totaled $2.7 million, which was compared to a cash position of $14.2 million on December 31st, 2021. Cash was primarily impacted by a principal repayment on the company's note payable, which was about $3.7 million, interest payments totaling around $1.1 million on the note payable, and payment of approximately $1 million for work on our Metaverse project, as well as increased spending for business development. And with that summary, I will go ahead and turn over the call to the moderator to queue up questions for our Q&A session.

Well, thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 if you would like to signal with questions, star 1. And once again, if you would like to signal with questions, please press star 1. Again, star 1 if you would like to ask questions. We'll pause for a moment. Once again, please press star 1 if you would like to signal with questions. Again, that is star 1. We'll pause for a moment. And Ms. Tian, I'll now turn the conference back over to you.

Okay, thank you. Thank you, everyone, for participating in Remark Holdings' first quarter 2022 financial results call. A replay will be available in approximately four hours through the same link issued on our May 3rd press release. Thank you and have a good afternoon.

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