Q1 2023 Remark Holdings Inc Earnings Call

Participants

Fay Tian; VP of IR; Remark Holdings, Inc.

Kai-Shing Tao; Chairman & CEO; Remark Holdings, Inc.

Todd Brown; Senior Manager of Financial Reporting; Remark Holdings, Inc.

Presentation

Operator

Good afternoon and welcome to the Remark Holdings Fiscal First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Fay Tian, Vice President of Investor Relations. Please go ahead.

Fay Tian

Thank you, Gary. Good afternoon, everyone, and welcome to Remark Holdings Fiscal First Quarter 2023 Financial Results Conference Call. I am 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; and Mr. Todd Brown, Vice President of Finance.
In just a moment, Mr. Tao will provide an update on our businesses, and Mr. Brown will recap our first quarter 2023 financial results. Following these remarks, we will open the call to questions.
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.
I will now turn the call over to Remark's Chairman and Chief Executive Officer, Mr. Tao, so he can provide additional information on Remark's businesses and recent developments. Shing, please take the floor. Thank you.

Kai-Shing Tao

Thank you for taking the time to listen to our quarter 1 update. We gave a fairly comprehensive update on our most recent conference call about a month ago, but today, we'll be more focused on giving some updates. Just like artificial intelligence, where every week yields significant advancement, at Remark, we are no different as each week presents us with new opportunities to attack as the demand of our platform is unprecedented.
As you know, with generational opportunities like AI and cloud technology for AI, it takes roughly 10 years from inception to fruition for all the efforts. For Remark AI, we are no different and certainly are not magicians. It took us approximately 5 years to build the foundation to where our AI technology is today and then the next 3 years to win the gold standard of customers around the world. And now our strategy is simple and straightforward: land and expand.
Starting in the East. With our Smart Schools business, our business continues to grow as we have now deployed to over 650 city schools in China, consisting of over 1 million students. With schools now coming back online and education remaining one of the most important priorities of China, we are seeing a strong recovery in this particular segment.
In addition, some of our new core technology developments in education include our Remark AI education quality evaluation system. Using Remark AI's computer vision, we are now able to help, analyze and assess student performance in the reading, speaking, art, science and physical education classes. This system has been accepted by many school districts as a standard student performance evaluation tool, and we are now anticipating deployment to over 1,000 schools by the end of this year.
Smart communities. After several years of postponement due to COVID, China Mobile is gradually restarting its smart community, and we in turn have resumed our own smart community deployment with them. We've completed over 100 smart communities in Q1. Just to remind all of you of the incredible opportunity here. We believe the smart community platform in China to be a multibillion-dollar annual opportunity. There are over 160,000-plus number of communities -- smart communities, each with an annual upgrade budget for digital transformation of roughly USD 100,000.
Remark AI smart community platform includes facial ID-based resident management system, AI parking system, safety and security system and visitor access control. We had originally commenced our deployment back in Q3 of 2020 and are excited now to resume what we originally started a few years back.
In the U.K., we continue to build momentum. What started from a little booth at a security trade show in London has now expanded to 6-figure contract wins. Our Remark AI platform provides metadata search, people counting, vehicle accounting for traffic and parking availability. One key win in the U.K. is helping with the migrant issue the country is dealing with in Dover. We were awarded this contract earlier this year and now looking to expand into additional opportunities as the U.K. is looking for ways to better handle the situation.
Moving to the U.S. public and venue safety. We continue to complete pilot tests in the public and private venue space and expect to provide more details during the current quarter and beyond. Public safety is the #1 priority on every administer, parent's and student's mind as guns have been compensating both middle and high schools in our hometown of Clark County and Las Vegas, making it a more pressing need for rapid adoption of our solution upon proving efficacy. We started here in Vegas, which is one of the top 5 largest school districts in the country. And we have already commenced similar discussions with the other school districts of comparable sizes as they have the same problems that Las Vegas is facing and are looking for solutions like ours to address them.
Obviously, #1 issue is weapons detection but extends beyond that. It includes fire and smoke detection, license plate recognition, fight detection, vandalism detection and et cetera. We expect to announce further strategic partnerships with both vendors and system integrators who can benefit from, including Remark AI, as part of their complete product suite solution as we jointly market to the public and private venue sectors previously mentioned.
The early demand for both our fixed and mobile Sentry units is unprecedented, and we are currently gathering deposits for shipments in Q3 and Q4, constrained only by the tight supply chain and delivery times. Once again, the budget has already been allocated and the need has been clearly defined, so it is up to us to execute and capture this once-in-a-generation opportunity.
We continue to focus on the mutual goals of positive cash flow generation and growth. Our business model is built upon annual multiyear recurring subscription model revenue that provides a total turnkey AI-powered platform for customers and partners. One of the key advantages to Remark AI is the speed we're able to move in the versatility of our Remark AI platform.
Recently, we were presented with a very small window of opportunity to present our platform to address the 911, 311 call center problems that cities around the U.S. are facing. Our competitors thought we would be unable to answer the call. But in a very short period of time, we presented to the mayor as well as the Head and Chief Technology Officer for over 40 different agencies. In a matter of days, we built a platform that was unique and embraced the latest and AI technology to help address the issues the city was facing.
Many of you know the wait times for 311, 911 are very long. A key reason for that is the lack of dispatchers. Our platform will do several things which combine the best in generative AI and computer vision AI. When a caller dials 311, our AI agent will speak to them to help understand the situation. Simultaneously, as they're speaking with our AI agent, the AI agent fills out the necessary paperwork to document the call.
Lastly, as they say, a picture is worth a thousand words. The caller would take a picture or video to showcase the situation, and our computer vision AI would better understand and independently verify the nature of the call. This solution is unique and very well received by our listeners. We are confident that after we win this opportunity, similar opportunities will present itself not only in other cities, but in any business that deals with forms and paperwork and obviously as well as anything to do with customer service like airports and restaurants.
Another breakthrough in the U.S. that we look forward to revealing more details is our expansion in the U.S. retail market using our visual checkout AI platform. Soon, we plan to announce our partnership with one of the largest retailing and technology companies to bring our AI technology to their customers, which mainly consists of convenience stores, chains and pharmacies with well over 2,500 locations. The technology addresses the current problems for self-service stores like Amazon Go, which are unable to accurately track the products being selected and checked out as well as using facial recognition as a form of payment. We are excited about this new venture as recent companies in this specific field achieved valuations well over USD 1 billion.
We also recently announced a partnership with one of the best companies in the people counting space called WaitTime. We expect to share sales resources with them as they have very established sales channels with Cisco and Intel and have made a strong entry here in the U.S. selling their people counting technology. Our strategy is to piggyback their sales team and relationships to help expand their offerings to their customers with our Remark AI platform.
On our last call, I mentioned our expansion into Latin America and the Middle East. We will be unveiling more in the next several months regarding our opportunities in the Middle East. However, I'm excited to talk about our current expansion efforts in one of the largest cities in South America. We are in the final stages of winning with the respective city's police forces to utilize our license plate recognition and mobile facial recognition on their entire police car force in the city which amounts to thousands of vehicles.
As you know, once we win this many similar opportunities will present themselves after we win in South America. As a point of reference, these deals are all 7-figure opportunities with a combination of both hardware and software, which ultimately means high-margin businesses for Remark AI.
Finally, to fully utilize the power of Remark AI's platform, we look forward to officially announcing our SaaS initiative with one of the world's top 3 cloud providers. Currently, the majority of our training of our AIOps models happen on-premise. We will now add our cloud component imminently as it allows us to an additional track for expansion to customers around the world. In short, we are offering our secret sauce of our AI-powered analytics solution, which are trained 3x faster than our competitors despite the constraints of a limited data set to everyone on a SaaS model basis. More to come.
Todd?

Todd Brown

Thank you, Shing, and thank you to everybody for joining us on today's call. As we have discussed with you previously, COVID-19 and China's former zero-Covid policy had been adversely affecting our business in China. Although we were certainly pleased to see China and its zero-COVID policy at the end of 2022, the policy is lingering effects as well as COVID infections continued during the first quarter of 2023. Business and economic recovery efforts have been slow and methodical as our clients and other Chinese companies learn that they likely do not have to fear the immediate reimposition of lockdowns or other severe restrictions on their ability to do business.
Even in the face of the COVID-related restrictions and their lingering impacts, we were still able to complete several projects in China primarily related to our smart community installations on behalf of China Mobile, which led to revenue for the first quarter of 2023 totaling $0.8 million, which represented an 82% decrease from the $4.7 million that we earned during the same quarter of 2022. We obviously would have preferred to achieve more of the project completions that we had planned for this first quarter of 2023, but we believe our project completions in China will begin to accelerate late in the second quarter and into the third quarter of 2023 as our customers begin to restart projects put on hold during the zero-COVID period and initiate new projects that had been on the drawing board when the strict preventative measures were ongoing in 2022.
Gross profit remained essentially unchanged at approximately $0.4 million as our cost of revenue decreased roughly commensurate with the decrease in revenue. In addition to the changes in revenue and cost of revenue, we experienced a significant decline in operating expense that reduced our operating loss to $3.0 million in the first quarter of 2023, a 27% improvement from the operating loss of $4.2 million we reported in the same period of 2022. The improvement in our operating expense mainly resulted from a $0.7 million decrease in certain expenses related to our development of our business. And we were also positively affected by decreases of $0.3 million in stock compensation expense, which is reported in general and administrative expense; and our receipt of a refundable tax credit of approximately $0.5 million from the government of the United Kingdom, which we recorded as a decrease in our technology and development expense.
A large batch of stock options granted prior to 2022 became fully expensed in January of 2023, which led to the decrease in stock compensation expense, while the tax credit we received in March of '23 resulted from our research and development activities in the U.K.'s tax jurisdiction during the 2022 tax year.
Net loss totaled $8.2 billion or $0.63 per basic and diluted share in the first quarter of 2023 compared to a net loss of $25.4 million or $2.42 per basic and diluted share in the same quarter of 2022. In addition to the impacts of items affecting operating loss, our net loss decreased primarily because the first quarter of 2022 included a $19 million loss on marketable securities, and that loss -- or that type of loss was not repeated in 2023. The decrease in loss on marketable securities, plus roughly a $0.6 million decrease in interest expense, was partially offset by an increase in finance costs of $3.6 million.
On March 14, 2023, we consummated transactions with Ionic Ventures, LLC with our senior lenders. First, we entered into another debenture purchase agreement with Ionic Ventures, pursuant to which we authorize the issuance of 2 convertible subordinated debentures in the aggregate principal amount of $2.8 million for an aggregate purchase price of $2.5 million. We issued the first of the convertible debentures during the first quarter of 2023 and received $1.5 million pursuant to such debenture.
We also received a total advance of $1 million in January of 2023 pursuant to the equity line of credit we have with Ionic Ventures that was established in October of 2022. The convertible debentures were issued in October of 2022 -- or that were issued in October of 2022 and March 2023, plus the advance pursuant to the equity line of credit gave rise to obligations to issue our common stock and in turn caused the increase in finance costs.
Also on March 14, 2023, we entered into new notes payable agreements with our existing senior lenders, which will result in our repaying an aggregate of $16.3 million to the lenders by October 31, 2023.
At March 31, 2023, we had a cash balance of $0.4 million compared to a cash balance of $0.1 million at December 31, 2022. Net cash used in operating activities during the first quarter of 2023 was $2.1 million.
With that, I will turn the call back over to Fay.

Fay Tian

Thank you, Shing. Thank you, Todd. Gary, could you please give the instruction to the audience on how to queue in for the Q&A? Thank you.

Question and Answer Session

Operator

(Operator Instructions) Showing no questions, this concludes our question-and-answer session. I would like to turn the conference back over to Fay Tian, for any closing remarks.

Fay Tian

Thank you, Gary, and thank you, everyone, for participating in Remark Holdings Fiscal First Quarter 2023 Financial Results Conference Call. A replay will be available in approximately 4 hours through the same link issued in our May 17 press release. Have a good evening. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.