Remark’s (MARK) share price has seen a steady decline in the last few years, and we believe that amidst uncertainty, now is a great time to sell the stock as there is more downside to go.
Remark’s current troubling position is nothing new.
Even before COVID-19, the numbers for Remark weren’t glorious for a company with a 68.2x EV/EBITDA (NTM). Every year since Remark’s inception, the company has accumulated a net loss and the company currently has a net deficit of $359 million dollars (Remark 10-Q, 2020).
(Koyfin, Financial Analysis – Remark Holdings)
Remark Holdings’ revenues have seen a significant drop since their decent 2017 fiscal-year numbers, yet their operating costs have somehow remained the same as 2017. Despite revenues of only $5 million in 2019, Remark spent $17.2 million on SG&A costs. The year before that, their revenue-to-SG&A ratio was similarly poor.
The company just raised $19 million in cash provided by financing activities, but half of that amount was already spent on operating activities during the first 6 months of 2020, and the company continues to be in repayment mode for the foreseeable future.
The company states that “our history of recurring operating losses, working capital deficiencies, and negative cash flows from operating activities give rise to substantial doubt regarding our ability to continue as a going concern (Remark Holdings 10-Q, 2020).”
The company hopes to continue to fund insane operating expenses and debts through revenue growth in its Technology and Data Intelligence segment. The company also hopes to repay the debt by potentially selling investment assets or operating businesses. However, getting out of debt and financial implications without further complications will be tough given that their current ratio is 0.2x. The company states that they “may fully utilize cash resources prior to August 14, 2021 (Remark Holdings 10-Q, 2020).”
We believe that there is no win-win situation here, as one of Remark Holdings’ main products (retail solutions) is greatly affected by COVID-19. This solution helps retail outlets analyze real-time customer shopping behavior, time of store entry, and busy areas of a store. The temporary shutdown of retailers has not only prompted the rapid growth of e-commerce but this transition seems like a permanent one. Expensive leases, combined with the limitless scalability of e-commerce, provokes questions about the future of retail. In a world where companies are looking to cut costs, purchasing an AI software that analyzes beaten-down foot traffic seems like a wasteful investment at the current moment – companies are more likely to be focused on the online space. Therefore, there is a small chance that the company will see significant growth in revenues in the near future, and Remark will be forced to either raise more capital or sell its entire business operations.
We believe that Remark’s other main product (AI Business) has been negatively affected by COVID-19, given the current trends in workforce dynamics. The shift from office work to remote work leaves Remark in a tough situation; the main selling point of this product is to analyze individuals that are crammed in a defined space such as an office or a store. It seems like the shift to remote work could also be a permanent one, as blue-chip tech companies such as Facebook, Apple, and Google are allowing employees to work from home for the near future.
Whether it be Chinese tech giants or American start-ups, there is no shortage of competition in the AI space.
We believe that there is nothing about Remark’s technology that potentially allows for true market dominance in the AI space. Additionally, the technology itself is nothing new, software that tries to detect body movement and temperature incorporates machine learning and neural network practices that have been around for a long time. Chinese company SenseTime already provides hundreds of millions of CCTV cameras to the Chinese government and continues to expand into the autonomous driving space. There’s no doubt that the competition in China within the AI space is insanely high.
In the United States, tech startups have been focusing on AI for quite some time. Hellometer is a startup that is quite similar to Remark’s retail solution service, both of which try to analyze employee and customer movement to improve operating efficiency. Hellometer has already partnered with prominent fast-food chains such as Dunkin’, Subway, and Taco Bell.
Another notion to consider is that 89% of Remark’s revenue comes from AI-based products and services (Remark 10-Q, 2020). Other revenues can potentially come from an equity stake in Sharecare, an online medical services company that will be crushed by growing competition and companies like Teladoc, ICliniq, and Amwell. Remark also owns ‘bikini.com‘, but e-commerce is an extremely competitive space amidst COVID-19, and Remark not only has to directly compete with purely digital channel companies but also indirect competitors who are traditional retailers but have moved to e-commerce recently due to the pandemic.
Remark’s numbers right now aren’t so good. Other company factors aren’t looking so good either.
Based on Remark’s financial statements, there are two lawsuits that they are currently dealing with, and their biggest litigation involves trying to reverse a share purchasing agreement with the opposition because Remark acquired companies in which material information was concealed and misrepresented. Although the shares involved in this lawsuit are non-dilutive, the company plans to “obtain additional capital through equity issuances (Remark 10-Q, 2020)” if cash runs out, which could lead to the dilution of equity within the company. The number of shares in the company has increased from about 28,000,000 to 51,000,000 in a span of 2 years.
(Remark 10-K, 2019)
Even before COVID-19, Remark had trouble paying rent for their former office in Las Vegas. This led to them being kicked out of the building, and Remark had to deal with a lawsuit from their old landlord as Remark owed over a million dollars (Remark 10-Q, 2020). Remark still has $0.15 million outstanding in relation to the settlement and will pay an additional $0.2 million if installments are not made on time.
Remark’s CEO has also been in some legal trouble as of late, and lawsuits from May 2020 show that CEO Kai-Shing Tao owes close to $100,000 in gambling debts to a few different Vegas casinos.
We believe that Remark is simply a discombobulated company that does not have the right resources and personnel to be self-sustaining for a very long time. Remark should have done a better job of investigating their potential acquisition targets for non-disclosed information, and poor financial planning has led Remark into a large lawsuit and settlement in regards to their rent. Remark’s CEO seems to be running up his own tab rather than focusing on his company’s continuous losses, and we wouldn’t be surprised if we saw the company go under in the near future.
All it takes is a few breaks for Remark to get out of the red.
Despite Remark’s downsides and net losses, Remark can potentially cut down on SG&A and other costs and land a big partnership that would bring in the cash they need to pay off future financial obligations and improve key financial ratios. It is also promising to see that Remark has left their large corporate office building and entered a lease that does not materially affect their financial statement, which could be a sign that they are being more conservative with their cash spend. Moreover, the CEO’s gambling debt problems could be a one-off and Kai-Shing Tao could be potentially fully focused on the development of the company.
In summation, we believe that there is little upside given Remark’s horrid financial position and the company will be in scramble mode for years to come.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.