Good afternoon, and welcome to Remark Holdings’ Second Quarter 2019 Earnings Conference Call. My name is Dory, and I will be your operator this afternoon. I will now turn the call over to your host, Brian Harvey. Please go ahead, Mr. Harvey..

KaiShing Tao, Remark’s Chairman and Chief Executive Officer; and Remark’s newest Board Member, Dr. Elizabeth Xu. A press release discussing today’s conference call and results will be going out shortly. In just a moment, Mr.

Tao will open today’s call with a brief introduction and on our business, and then he will turn the call over for a brief introduction to Dr. Xu. Then I will recap our second quarter 2019 financial results. 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.

Also, please note that the company may discuss financial measures not in accordance with generally accepted accounting principles, commonly known as GAAP, to monitor the 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 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 would now like to turn the call over to Shing for a brief overview of our business. Thank you..

number one, get our smart terminals and AI into as many places as possible and then layer on additional services and licenses. Our first year economics provide gross margins of approximately 10%. However, in years two through five, we have SaaS margins of 80% to 90%. Our internal goal is to deploy one million units in the next 24 months.

This is a greenfield land grab opportunity. Number two, position our facial and object recognition as a way to bring deep data analytics that has only been available to online retailers into the offline world of traditional retailing by getting our smart terminals into as many points of contact as we can.

And three, optimize the value of our Sharecare position in order to maximize the return to our shareholders and alleviate balance sheet pressure and to give us additional fuel to grow our AI business faster.

I believe Remark Holdings provides investors with both value, due to our stake in Sharecare, and optionality based on the growth opportunities in AI that are in front of us. With that, I’d like to turn the call to our newest board member, Dr. Elizabeth Xu..

This is Elizabeth Xu. As a technologist in the enterprise software space in the last 25 years, I’ve lead teams and build a few billion dollar revenue software packages and solutions. I’ve been working with Fortune 500 companies and customers very closely, helped them build more competitive and successful businesses using those technology and products.

Over the last 18 months, as the group’s CTO at the CP Group, a Remark customer, I have seen the progress of Remark’s AI solutions in urban life circle using leading facial recognition and deep learning technology. Remark’s engineering team has done a very good job in refining those AI solutions that have been accepted by the market.

As a new Board Member, I’m excited about the urban life circle AI solutions, and I look forward to working with Remark’s team on its AI product strategy and the solutions very closely..

Thank you, Dr. Xu. I will now provide a brief overview of our financial results for the second quarter ended June 30, 2019. As previously discussed on May 15, 2019, we completed the sale of Vegas.com for an aggregate purchase price of $30 million, using the proceeds to significantly reduce our debt obligations.

We recorded a gain of $6.5 million on the sale of Vegas.com business, which had formerly comprised Remark’s Travel and Entertainment segment. The results of the formerly reported Travel and Entertainment segment, including the gain on the sale, are now reported in discontinued operations.

The revenue from continuing operations for the second quarter of 2019 was $2.9 million, down from $3.9 million during the comparable period of last year.

As Shing touched on, regulatory changes in China’s financial services market caused us to discontinue our FinTech business in 2018, resulting in no FinTech revenue this year after reporting $2.2 million in last year’s second quarter. However, AI-related revenue in the second quarter of 2019 grew to $2.5 million.

This was more than double the $1.2 million reported during the second quarter of 2018, and significantly higher than the $400,000 reported in the first quarter of 2019. This increase represents the completion and passing of several proof-of-concept tests on projects in the beginning of deployment and implementation phases.

Total costs and expenses for the second quarter of 2019 were $5.8 million, a decrease from the $10.6 million reported in the comparable quarter of 2018.

The decrease is primarily attributable to decreases in cost of sales as a result of the discontinuance of the FinTech services, lower consulting fees due to declining use of external consultants and declines in payroll and related costs as a result of headcount reduction and bad debt expense.

The operating loss declined to $2.9 million in the second quarter of 2019 from $6.7 million in the second quarter of 2018, commensurate with the cost and expense declines. Adjusted EBITDA was a loss of $2.7 million from continuing operations as compared to an adjusted EBITDA loss of $5.3 million in the second quarter of last year.

Our net loss totaled $2.8 million or $0.06 per diluted share in the second quarter ended June 30, 2019, compared to net income of $3.4 million or $0.10 per diluted share in the comparable period of the prior year. The net income in the prior year was driven by a $10.1 million gain in the change of the fair value of our warranty liability.

At June 30, 2019, cash and cash equivalents balance was $2.1 million compared to a cash position of $1.4 million at December 31, 2018. Cash increased primarily due to the timing of payments related to elements of working capital and the issuance of common stock. With that, we’d now like to turn the conference call over to questions.

[Operator Instructions] Dory, could you please instruct the callers on how to queue up with their questions?.

[Operator Instructions] And we will take our first question from Darren Aftahi with Roth Capital Partners..

Hi, everyone. This is Dillon on for Darren. Thanks for taking my questions. First, regarding some of the various projects you’re working on in AI, I know you talked about some of the pharmacy and the taxi aspects and also the school safety.

Could you give us an update on some of the, I guess, older projects you talked about in the past like restaurants and construction and then sort of the rollout with the 7-Eleven deal..

Hey Dillon. Okay. So we’ll start with the 7-Eleven deal. The 7-Eleven deal is going slow. There I think it’s not a secret that in Thailand that there’s been a strong backlash against facial recognition so that’s something that is a macro issue.

So we are not spending any time or resources on that project until things change there and focusing our efforts in China, where the market and the budgeting is readily available right now. Okay. The regarding the construction projects, I think it’s going quite well.

We’re working with China construction group, which is, I think, the third largest company in China and working on a number of their different construction sites primarily in China. I think we will be ready to give an update on how those projects are going in the near future, but not ready as yet right now.

And what was the third one?.

Restaurants..

Food, same thing with the restaurants. Restaurants, as we previously announced in Shanghai. Right now, certainly, food safety is a major issue, but the budgeting from the government hasn’t exactly been released yet for the restaurants to do the food safety measures, so same thing.

I think we’re very confident that our technology is kind of best-in-class there, but until the budgeting is available to us, we’re focusing our efforts on the clients that and industries that can pay us now..

Got it.

And then sort of out of that $2.9 million, I think you said, of revenue this quarter, how much of it was from the deferred revenue that you saw in 4Q and 1Q versus some of the new projects?.

Yes. Right now, with those projects, we don’t break that down. But I would it will be safe to assume that part of that revenue is based on the cash that we’re collecting because of the FASB 606. We can only recognize the revenue as we collect it.

And as we in terms of new revenue, we will be accounting for that as we finish the service and collect the cash..

Got it. Okay.

And then did you sell any stock through Aspire during the quarter?.

Yes, we did. And then that will be disclosed in the filing tomorrow..

Got it.

And then lastly, regarding the CFO, is this are you expecting to hire a new one in the next couple of weeks? Or is it a little bit later in the second half of 2019?.

I think we will have a new CFO sometime in the third quarter of this year. And that’s something that we have a handful of candidates that we have in mind, and it’s just coming to the kind of right fit. But I think the they all kind of share very similar qualities. They have experience in working in China with technology and AI.

I would say that’s number one. Number two, they have both very strong relationships with public and private funds. And number three, certainly, with the I’m sure you’ve read about the strength of the STAR Market in Shanghai, which is the competitor to NASDAQ.

Those are all very interesting opportunities for us if we were to potentially spin off our asset and really get full value for what we are doing right now. Clearly, in the U.S., the investor community hasn’t exactly enjoyed what we’re doing.

In China, there’s much more of an appreciation for AI technology and the scale that it can grow over the next three to five years..

Great. Thank you..

Thank you, Dillon..

Our next question comes from Steve Allen, a private investor. Please go ahead sir..

KaiShing, how are you today?.

Hi, Steve..

Question on the trade war situation in China.

Is that affecting your ability at all to pursue any projects?.

We’re not seeing it. Well, actually, I feel it kind of works in our favor because a lot of the competitors that we’ve been facing from China, frankly, hasn’t been allowed in some of these bids. So we’re not seeing how it can affect us.

Maybe initially, but I think with our company, as you begin to really understand the business, you will see that the trade war that has happened between China and the U.S. have minimal effects on us..

Okay.

And from a FinTech standpoint, does that business ever come back? Or is it totally gone away?.

It might. I mean, it might come back. I mean, from our standpoint, it became a business that we’re not just going to try to go after revenue just for the sake of revenue. From our standpoint, the government came in, made a lot of measures that made it virtually impossible to make a profit in that business.

And so we’re not going to chase revenue for revenue’s sake. And but this was a kind of a mandate set by the government to clean out that industry. And I think they’ve done quite drastic cleanup of that industry. So in the next year or two, it might change where it actually makes sense to go back in.

But for the time being, again, we’re not putting any time and resources into it and focusing on what can grow for us now..

I have one more. What opportunities? I know that it seems like the focus is all in China, but what opportunities do you see in the United States? And do you chase any of those? Are you trying to pursue any of them..

Yes, great question. I think in the U.S., we’re certainly very active right now with a handful of potential partners in the U.S.

I think as evidenced by McDonald’s recent acquisition, it’s the largest acquisition in 20 years of an AI company, which we certainly feel that provide less in terms of technology and certainly, in terms of revenue numbers than we do.

And by the way, it’s their largest acquisition in 20 years, so you can kind of see where McDonald’s is heading towards. With that, many of the companies in the U.S. are still very slow to kind of change their course. And that’s something we have to deal with.

And it takes a while to actually not only get them to buy into what AI can do to transform their business, but a lot of these business have to set aside the budgeting as well. So it’s a longer sales cycle.

Having said that, we are currently working with potentially five partners on the areas of retail and fast casual restaurant space and hope to have something significant announced by year’s end..

Okay, thank you..

Thanks, Steve..

And our next question comes from Steve Wagner with Wagner Financial. Please go ahead sir..

Thank you, and thank you very much Shing and also nice to hear Dr. Xu and Brian is good to hear your voice as well. I’m a new shareholder that I’ve been accumulating in a position. We work with a lot of high-net-worth clients as well that we’re looking at this company for. So I just have a few questions on the Sharecare investment that you have.

Is it you own a 5% or 6% position in that.

Is that correct?.

I would say it’s not that high. I’d say it’s between 4% to 4.5%..

Okay. So still a good position and I know....

We’re one of the largest shareholders of Sharecare..

Okay, good to hear. So monetization, can you give a little bit more detail on the varying ways that you’re looking to monetize that? I know you’d talked about selling some or all of it, borrowing against it.

Is there any other is there any other things that you’re looking at to monetize that position?.

I mean I think those are the kind of the front-and-center options because they are also the fastest as well. And I think there could always be like creative ways of like maybe setting up a different SPV and all those different kind of things.

But I think right now, as far as we’re concerned, given the most recent investment by Quest Diagnostics as a they’re, obviously, a smart and a very large strategic partner for Sharecare, it sets the value for the company and kind of sets things in motion where we can look to monetize our stake.

I think the ability to refinance our position out and where we don’t have to give up the upside in case Sharecare does go public or if there’s a deal at hand where we can sell a portion of our company or sell portion of Sharecare really to address our balance sheet issues.

It’s very clear that we have some debt that we still owe that we want to get paid off as soon as possible. And then number two, to give us the runway where we don’t have to go through any more dilutions that have hurt the stock in the past.

So we’re trying to address those needs, and any monetization that we have will address those two needs and also addition not only give us additional capital to allow us to continue to grow our business faster, but the additional capital to allow us to eliminate the dilution that we’ve experienced in the past over the last year or so okay..

Do you have a time frame set, a drop-dead date in terms of when you’d like to get a decision wrapped up so that we can all move forward? Do you, importantly, moving forward and, let’s just say, taking off..

Yes, we’re trying to do this as fast as possible. I would say, over the next six to 12 weeks, we’re trying to move down this path as fast as possible. I think it’s the right result for all the different parties. And so we just got to get there..

Okay. And again, obviously, you guys have to do what you have to do in that regard. It seems like from I’ve done some research on Sharecare, very promising company. It would be very I don’t know, for me, it would seem disappointing to give up all of that at this point..

Yes, we’re weighing I totally agree with you. We’re weighing all those potential issues, especially with the strength of the IPO market, in particular with the digital health area. We saw the IPO of Livongo.

That’s a business that just specializes in diabetes, with top line and bottom line numbers certainly a lot smaller than what Sharecare is, and Sharecare has a very broad platform. So with that, we certainly don’t want to just give up that opportunity as well..

What would be the amount of cash infusion that you would want to get or that would be good that would free your mind up in terms of allowing the company to go forward without dilution, without any short-term cash issues.

What would that number be in your view?.

I will reserve my comments on that because we’re in negotiations right now. So, I certainly don’t want to give my hand on that..

Okay. All right. Well, thank you. We'll look forward to maybe getting to soon to meet you guys and developer relationship and we'll be obviously very interested in the proceedings. Thank you. Great. Thanks for your time..

Thank you, Steve..

And our next question comes from Mike Rufino, a private investor. Please go ahead sir..

I believe the my question was addressed by the last caller. But I couldn’t quite hear the percentage when [indiscernible] or the Sharecare investment.

What percentage was the was that of the overall Sharecare?.

We are roughly between 4.5% and 4.7%..

And you were saying that Sharecare currently is projected to be worth $400 million, do you say? Or....

No, over $400 million has been invested into the company..

Yes. I read something that it could be $1 billion in revenue over the next year or two.

Does that kind of make sense to you?.

No, those numbers, I can’t comment on. I’d kind of leave that to the management of Sharecare. All I’m very comfortable in saying is that certainly, Sharecare is in a very fast-growing space. The business is growing very rapidly. It’s run by a very well-seasoned team, and we’re certainly looking to extract the most value of our stake in Sharecare..

And my final question. I don’t know if this is more of a rumor or truth, but I’ve read things online that say that the investment in Bikini.com is not producing a profit.

Is that a current investment? Or is that something used to Remark used to own?.

No, Bikini.com is a business that Remark does own, the and the business is not profitable.

But I think in the space that Bikini falls into with digital media and digital ecommerce, it’s more about building the scalability and the traffic, and that’s something that we expect to as the company is transitioning into a pure AI play that we expect that business to be something that we potentially won’t be talking about in the future..

And something else. I read this. In China, you struck a deal with Jason Statham to be a spokesperson for a high-end car company based out of California. When do you expect to see revenues from that? Or maybe I could hear some more information on that..

Yes, absolutely. We’ve already I believe we’ve already recognized some of that revenue in this past quarter. We put together one of the largest endorsement deals for a U.S. celebrity or actually an English a foreign celebrity into China, and it’s quite an event. Jason and his team, they attracted a crowd of over 30,000 people for the launch.

Actually, it was of a U.S. brand called Saleen, and they took out the Bird’s Nest in Beijing, and they unveiled their new sports car. And so this is a business that we acquired several years ago, has gone through some pain, but this is kind of our first large deal coming out of our restructuring.

So we’re very excited to not only the underlying business of what it is, but what other synergies it can lead with our other businesses, especially with AI..

A lot of other investors are curious since the sale of Vegas.com, if the company in the future will be based more in China and less in the United States or whether they’re concurrent ongoing business model for both countries..

I mean, frankly, we go where the money is, right? I mean, in China, why a lot of people ask us, why are we in China. It’s very simple. AI in China, AI adoption is certainly the highest in the world, number one. Number two, they have certainly the largest base, customer base in the world. So while I understand to some U.S.

investors that gives us there’s some fear of Chinese companies they’ve never heard of. There certainly have been some issues with accounting irregularities in China. But those are issues that don’t apply to us. And we are it’s taken us about two to three years to build our underlying technology.

A lot of people doubted us whether our technology was real. But we seem to beat all of our competitors on third-party rankings most recently NIST, which is kind of the gold standard for facial recognition here in the U.S. And now we needed to prove the next step was the fact that we need to prove that we can win the contracts, which we’ve done that.

And now the last step is collecting on the money from the contract, and we’re doing that. So it’s taken us some time to get there, but to build a good product and a good business, that’s what it takes..

But the entertainment section of the business is still focused more in the United States.

Just for a lot of the I know that the AI is much more popular in China, but there’s still a component of the business that’s still headquartered in the United States, not becoming totally a Chinese company, right?.

Yes. I mean, we’re a global company. I think it’s impossible to say you just do things that are just 100% in China, or 100% in the U.S. And the fact is Chinese companies are looking to expand globally with the U.S. being a big target. It’s no secret U.S. companies are trying to expand into China, because that’s where their growth will come from.

So, I think it would be it’s the right short-term, near-term and long-term decision to be to have a presence in both areas..

And final question. CP rail, do you have any update on the investment that they’re making or your revenue that you’ll any new contracts coming that will generate revenue with CP rail. That was there’s a lot of talk about that a while back, but I haven’t heard anything lately..

CP rail?.

The high-speed train..

The high-speed train..

There’s been which was it with CP Group? Or was it with the high-speed railway I don’t know?.

The high-speed....

Yes, those are kind of long-term projects that, right now, frankly, it’s still too early. It’s in the testing stage. I mean, as you can imagine, in China, this is with the one belt, one road initiative, they’re building 50,000 kilometers across China, and this is of very, very high national interest.

So any decision that’s being made doesn’t come lightly, and it has to go through a lot of testing. But having said that, while we build our business and go through these testings, if we’re putting ourselves in a position that potentially we might be in the mix and upon winning, that presents a huge opportunity in the future..

And I think a final thought about the stock price. Much yes, it does seem to be very undervalued. You’re absolutely correct. And I think what happens now is people look at news, and that generates more interest than causes stock to go up. Unfortunately, the press releases aren’t on a regular basis.

Here lately, it seems like there are long periods of time, where we don’t hear anything about this in the U.S. media and kind of like Yahoo! stock news or other resource. So it might be good to if you can just update us..

Yes. For sure, we’ll do that. I think we have released a high single maybe eight or nine press releases this year.

And but please appreciate the fact that due to the contracts that we signed with our customers, there’s a competitive element, where our customers don’t want others to know what they’re doing, right? So we have to be very appreciative of their concerns, so number one.

Number two, certainly, the elephant in the room is certainly our short-term balance sheet issues. But as I mentioned in our call, with the monetization of Sharecare, that concern immediately goes away. And so that’s something that we’re working very hard and fast to get that accomplished..

And we all appreciate that you’re looking for short-term revenue solutions and ways to generate revenue more quickly. That will help you get beyond that. Thank you very much for your time and appreciate all your efforts..

Thank you, Mike..

[Operator Instructions] We’ll take our next question from Rob Mountain with Mountain Capital Management. Please go ahead sir..

Thank you. Hi, Shing, it’s Rob here. Just a lot of the questions were covered, but I have a couple more.

On the liquidity issues we talked about before, you talked about earlier, what do you plan to do if you can’t monetize Sharecare in the time that you expect? How long do you have?.

We expect to monetize it soon. So that’s something that we’re going down that path and not turning back from..

And if it doesn’t happen?.

Thanks. I think we certainly have to look for additional partners to continue to build our business. This is a position that we’ve been in as you know, with the history of Remark and where we are, we’ve never had an IPO, where we’ve had a lot of cash to work with. So working with limited funds over the last four or five years, we’re accustomed to that.

So we’ll find a way to continue to grow our business until we find the right outcome regarding monetizing our Sharecare stake..

Okay. And another question was, I know your clients don’t want to reveal who they are. But could you give us some idea of what your backlog is of signed clients around revenue....

Yes, absolutely. One I’ll kind of address the two clients that we mentioned in our in just in this call. When we first just to take you through a time line, it took us about seven months to go through a proof of concept, test our technology and implementation in working with the Lotus supermarket chain.

With that success in two stores, we were able to attract the interest and improve our ability to deploy our technology in creating a smart store with China’s largest telecom operator, okay? And that pipeline is over 17,800 mobile stores that they own and operate.

And with that, because they are the leader, that has brought us within the kind of the has brought us the second largest telecom operator in China as well. So just working with these two clients alone will keep us very busy, will help us on our top line and bottom line numbers.

But we’re certainly not stopping there and looking to other opportunities, as I referred to in the on the earnings script..

I like the word busy. Last point that you talked about earlier was that the real China-U.S. trade war is really about the supremacy of technologies. And I think at the center of this is artificial intelligence, AI.

How are you protecting your intellectual property?.

What we do with our intellectual property, we certainly take all the legal steps. We’re taking all the legal steps to protect it.

But also, what we’re offering in terms of the AI that we’re offering, it’s not kind of the to the controversial stuff that you kind of read in the papers, where our solutions help everybody in terms of what we’re focused on in terms of retail.

We’re trying everyone wants the great story of growing their revenue and cutting their costs, and that’s the solution that we’re providing. We’re not getting into any of the controversial stuff that might cause any issues. Having said that, IP is certainly very important, and we’ve hired the best lawyers in China and the U.S. to help us protect that..

Okay. Those are my questions and before I just pushing luck going forward. And thanks Shing. .

Thanks..

And it appears there are no further questions in the queue at this time. Mr. Harvey, I would like to turn things back to you for any additional or closing remarks..

Thank you, Dory, and thank you all for participating in Remark Holdings Second Quarter 2019 Financial Results Conference Call. A replay will be available in approximately 4 hours through the same link issued in our July 25 press release. Thank you, and have a good afternoon..