Earnings Transcript for MARK - Q1 Fiscal Year 2023

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

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’s 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 UK’s tax jurisdiction during the 2022 tax year. Net loss totaled $8.2 million 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 two 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.

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.