MIND Technology, Inc. (MIND) Q2 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Mitcham Industries Second Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard, Dennard Lascar, Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Good morning everyone, and welcome to the Mitcham Industries fiscal 2020 second quarter conference call. We appreciate all of you joining us today. Your hosts are Rob Capps, Co-Chief Executive Officer and Chief Financial Officer; and Guy Malden, Co-Chief Executive Officer and Executive Vice President of Marine Systems. Before I turn over the call to management, I have a few items to cover. If you would like to listen to a replay of today's call, it will be available for 90 days via webcast by going to the Investor Relations section of the company's website at mitchamindustries.com or via a recorded instant replay telephonically until September 12. Information on how to access the replay features was provided in yesterday's earnings release. Information reported on this call speaks only as of today, Thursday, September 5, 2019, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control, and that may cause the company's actual future results or performance to materially differ from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time-to-time in its filings with the SEC, including in its annual report on Form 10-K for the year ended January 31, 2019. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday and please note that the contents of our conference call this morning are covered by these statements. Now, I like to turn the call over to Guy Malden. Guy?

Thanks Ken, and good morning, everyone. We would like to thank you for joining us today for our fiscal 2020 second quarter conference call. I'll begin by making some general comments about the second quarter. Rob will then discuss our financial results in more detail and briefly address our market outlook. I will close with a few final comments and we will then open the call for questions. Let me start by making a few observations. Examining our financial performance on a year-over-year basis, we posted improved results over the prior year second quarter for the most part with consolidated revenues rising roughly 7% and gains in the Marine Technology product segment being partially offset by declines in our leasing business. On a sequential basis, revenues contracted from Q1 levels, but the downside impact was driven almost entirely by a sizeable drop in leasing activity, which offset revenue gains posted by our Marine Technology segment. While seismic leasing conditions remain very challenging, there continuous to be isolated pockets of opportunity within areas such as Alaska, Columbia, and Eastern Europe. Our Marine Technology Product segment drove most of the upside gains, both sequentially and year-over-year. During the second quarter, we delivered our first new build SeaLink streamer systems, and received the first orders for our next generation side scan sonar product MA-X. In addition, we also completed the initial phase of SeaLink repair activity for Mitsubishi for whom we provide support services as a part of a support agreement signed in early 2018. For the Marine Technology segment, we continue to see a number of opportunities for expansion through new customers and new applications of our Marine Technology. However, we’ve also seen the pace of firm order trail our expectations, and become somewhat constrained by customers capital availability, resulting in upgrade decisions being pushed further out. Our Seamap source controller orders in particular have not tracked with our projections as we’ve seen several of those orders postpone, again due to more restricted capital in addition to overall global economic uncertainty. I like to note that despite these impairments, the prospects we’ve seen through the year have not gone away and are still available, but the realization of these prospects has most probably been pushed to the right as a result of industry conditions. Now, we believe, these orders could potentially be received, either later this year or into next year. So, in summary, we remain enthusiastic about the overall health of the market and the number of enquiries we have been fielding for our Marine Technology products. And with that, now let me turn the call over to Rob.

Okay, thanks Guy. As usual, I’ll begin by giving a more detailed review of the financial results, then I’ll make some comments about our views on our current and near-term market. Let me start with the Marine Technologies Product segment. Revenues for the segment totaled $6.7 million in the quarter, up 12% from $6 million in the second quarter a year ago. Seamap revenues rose 29% to $4.9 million in the quarter, which was up from the $3.8 million in the second quarter of last year. Second quarter revenues from Klein were $1.8 million, 16% increased from $1.6 million a year ago. As Guy mentioned, although we delivered our first SeaLink streamer system, anticipated orders for our source controllers have not yet materialized. We believe these orders will likely occur either later this year or next. In the equipment leasing segment, revenues decreased 12% to 2.2 million in the quarter, compared to 2.5 million in the second quarter a year ago. The year-over-year decline was evenly split between lower equipment leasing revenues and lower lease pool equipment sales. We are continuing to monitor the conditions in the land leasing market and may adjust the size and compensation of our lease build to suit both the sizing market and our longer-term goals. Let me discuss the profitability of each of the segments now. Second quarter gross profit for our Marine Technology’s Products segment was $2.8 million, which is flat with a year ago. This represents a gross profit margin of 42%, compared to 44% in last year’s second quarter. And the slightly compressed margin this year is a result of relatively higher amounts of unabsorbed production cost. In our equipment leasing business, we again saw reductions in our depreciation expense, due to our ongoing asset rationalization strategy. Depreciation expense in the second quarter was more than half to 1.1 million from 2.4 million a year ago. So, the sport was lower leasing revenues and lower depreciation expense raised gross profit in the quarter, which came in at $46,000, compared to a gross loss of 801,000 in the second quarter of fiscal 2019. Our general and administrative expenses were 4.8 million for the second quarter of fiscal 2020, compared to 5.5 million for last year's second quarter. The year-over-year improvement reflects our ongoing restructuring in the leasing business and the lessened impact of start-up costs related to our new products and the related operations. Our R&D expense was $498,000 this quarter, compared to 312,000 during last year's second quarter. And we’re ramping up spending as we continue to develop the MA-X Technology and to respond to specific requirements of programs for our commercial and military customers. Our overall operating loss for the second quarter this year was $3.1 million, compared to an operating loss of $4.6 million in the second quarter of fiscal 2019. Our second quarter adjusted EBITDA was a million-dollar loss, compared to 1.1 million loss in the last year's second quarter. Mitcham's financial position and liquidity remain very strong. At the end of the quarter, we had about $27 million of working capital and that included cash and cash equivalents of about 7.5 million. And Mitcham's capital structure remains entirely debt free. Let me make just some few comments about our near-term market outlook. As Scott touched on, despite several project decisions being delayed until later, the Marine Technologies Products segment has a robust level of opportunities available. And our newer technology such as SeaLink and MA-X are garnering healthy levels of customer interest. As of July 31, 2019, our backlog of firm orders for this segment was approximately $14 million that’s up from $11 million as of April 30 of this year. These new bookings include orders for our MA-X Technology. Orders for products encompassing this technology have been stronger than we had anticipated and we’ve gained exposure to both military and commercial programs as a result of this new technology. As we’ve said previously, backlog tends to be an appropriate indicator of overall demand and general market conditions, but it’s difficult to apply when comparing quarter-to-quarter results, but despite the short-term challenges and some tightening in CapEx budgets we believe that the overall health of the marine market remains quite sound with bidding activity and the pipeline of prospects approved from a year ago. For our SeaLink business, SeaLink should make solid contributions through the balance of the year, due to its strong backlog as order bookings have been more than enough to keep our Malaysian production facility utilized for the rest of this year. Our BuoyLink RGPS tracking systems are also ahead of plan and are exceeding expectations thus far through the year. As we mentioned earlier, orders for source controllers have lagged expectations. We continue to pursue a number of specific opportunities and are optimistic that we will land these orders. However, given delivery times from these large systems, revenue from the sales of these products will likely be less than originally expected in fiscal 2020. Klein will continue fulfilling deliveries related to its recent order bookings, including for MA-X related products. We are also actively pursuing certain government programs that could have a meaningful impact both in terms of establishing ongoing relationships with these government entities, as well as giving a foothold to new markets. Programs of these types have the added benefit of providing a backlog of orders and ongoing support activities that can encompass multiple years. For the equipment leasing business, conditions remain relatively weak, but we have seen some pockets of opportunity. We expect to see marginal improvement from the second quarter levels as projects in Eastern Europe, Alaska, and Colombia are expected to commence in the third and fourth quarters. For the current fiscal year, we continue to expect solid improvement over fiscal 2019. However, due to the delay in expected orders that Guy mentioned, it is now unlikely that we will produce positive operating income for all of fiscal 2020, but we do expect to generate positive operating income by the fourth quarter of this year. And with that, let me turn things back over to Guy to give you feel more comments before we take questions.

Thanks, Rob. Although the expected shortfall in source controller sales and the effect on our financial results this year is of course disappointing. This in no way dampens our enthusiasm regarding the prospects for our business. We have continued our efforts to push the benefits of our Marine Technology Products such as MA-X and SeaLink to the hydrographic, oceanographic, defense, security and marine seismic industries. MA-X in particular has enabled us to leverage our position in the industry into new customers and new applications, which will meaningfully benefit both our near and long-term prospects as we continue to expand our presence in the marketplace. One of our objectives is to expand our technology offerings in order to provide more complete solutions to our customers, as well as to enter new markets. In that regard, we are engaged in a number of internal development activities and MA-X is the most visible example of that. However, we are also exploring partnership arrangements with others. It’s our belief that in some cases, by working with other companies, we could add to our portfolio of technology and products, more economically and perhaps more importantly bring such technology and products to market much more quickly. We are currently engaged in a number of discussions regarding these types of arrangements. Now, that concludes our formal remarks. We’ll be happy to take any questions now.

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Tyson Bauer with Kansas City Capital. Please proceed with your question.

With morning, gentlemen.

Hi, Tyson.

Just to just touch on that last comment that you made on the partnerships, is there a financial aspect of those partnerships either favorable to Mitcham or potentially where you would be required to put up some kind of capital to participate in that partnership?

I mean the answer is, yes. They will provide you potential forms that we're looking at and discussing. They all would have obviously what would hope to have a financial benefit to us over the long-term as we’re able to take the technology to market. In some cases, there may be some investment required. But the way to look at, I think Tyson is, you’re adding new technologies, so if you're going to do it yourself, you're going to make investment as well. So, this is just is another way of making that investment, and maybe we think more economically and again much faster to market. Short answer to your question is, there are variety of forms that these potential deals we are looking at.

Would it be safe to say then that these potential partnerships would include companies larger than yourself to have established distribution and relationships present in the markets that they are in?

I think that’s fair to say, yes.

Okay. To hit your Q4 target, if source controllers are getting pushed to the right and are not going to be as big of a contributing factor as we thought they might be earlier in the year, what needs to happen and are we then putting a lot of reliance on that new technology sales with the MA-X, Klein, some of these other areas to backfill to allow you to meet that guidance goal?

Actually, from a magnitude standpoint, the impact of the new technology of MA-X in particular isn’t that large this year, you know there surely is an impact, but it is not that large. So, the answer is no there. We see the benefit cover the contribution coming from our SeaLink orders that we are executing on today and we do think there will be some source controller activity, as well as BuoyLink activity in the quarter.

With the source controllers not hitting what you originally thought, is that just due to less mapping occurring, less upgrades by clients or just less new builds?

It’s not new builds, it is all less upgrades. Again, people being capital constrained and staying with the equipment that they have, requirements for the new technology of shooting patterns being pushed to the right as well as far as the impending surveys. So, it is kind of all the above. The only – for one thing is not any new builds. There aren’t any really new builds coming out, but we are trying to upgrade or add some particularly on the shooting boat side some additional resources there.

Yes. I mean what we're seeing, Tyson, we think it's just people are trying to delay CapEx as long as they can. So, kind of liked in the last minute.

Okay. And last one from me, I’ll get back in queue. I think you alluded to this just by your commentary and your outlook, a focus on commercial and government, which I’m guessing you have a lot to do with scientific and military applications. Are these the type of contracts? I think you said multi-year, the size of these contracts. Are these individually these contracts something that really moves the needle for Mitcham, especially given your small size? And can you provide any kind of timetable or pipeline that we could watch?

Sure. I mean, yes, we think they do move the needle for us. They are not such a size that all of a sudden, we're right beyond the next day. But they do have enough size to have an impact, and I think as importantly as that is, it really establishes our sales in certain markets, and allows us to build from that. So that adds to their importance. There are a number of these we’re pursuing now, a couple of them are relatively near-term. We would like to see something by the end of the year, if not before. So, I think, you know, keep your eye open through the balance of the year.

Alright, thank you.

Your next question comes from the line of Ross Taylor with ARS Investment Partners. Please proceed with your questions.

Thank you. We'll Tyson asked a number of my questions, particularly with regard to government and defense, but on the bigger picture basis, is 2020 the year where shareholders should finally see the company crossover from being hopeful to being company capable of producing sustained topline growth and free cash flow generation?

Yes. Ross, we really do think that. Obviously, we went into this year, I think we already hit a bit earlier, but again for the reasons we talked about today, things have been bit delayed. We are every bit as enthusiastic and believe as firmly as ever as to where we are taking this thing and so, we really do believe that as we ended the fourth quarter into next year, we’re going to start to show the financial benefits of it. So, we’re very optimistic about that.

And you talked about customers pushing decisions and upgrades and buys to the right, but there would be a limit to how far to the right they can push that and therefore are we getting in 2020, do you think that we're going to get to where they can really push them to the right any further?

Yes, I think, but I mean obviously every time something is delayed there is always a risk that it goes away. We haven't seen that happen yet, and we will emphasize that, but that’s always a danger that market conditions change such that that need gives away. We don't think it’s going to happen and we do think we are going to see a lot of these things happen, again later this year, but orders were received later this year. This can be so late in the year; we just can’t execute on. There are delivery times, especially for ancillary products, that are just – we're going to push deliveries out into next year.

Okay. I would say that – I think your investors have been at least up until the last two weeks very patient and incredibly patient as you guys redirect the company from being kind of a tertiary oil service provider to more of a technology-focused company across a wide array of industries, but I think it’s important to remember that shareholder patience is not endless and the last couple of weeks have shown us that. And it is our strongly held belief that this company is easily worth two 2 to 3 times whether it’s trading at strategic investors and if you're not able to see 2020 be the year that you get this turnaround that we cross that Rubicon. We would strongly hope that you would think about your shareholders and kind of put us out of our waiting for good old misery, and find a strategic who would, quite honestly, take this company for two or three times when it’s shading out, and not even have to issue an 8K on the process because the technology you had is valuable, the opportunities you have are valuable, but quite simply it’s clear that the market doesn't really love small under followed, sorry Tyson, under-followed companies no matter how exciting the longtime stories are.

Understood. Thanks. Appreciate the comment.

Thank you, sir.

You bet.

[Operator Instructions] Thank you. Our next question is a follow-up from Tyson Bauer with Kansas City Capital. Please proceed with your question.

You recently added or replaced a director with a retired admiral, obviously, with greater focus on to the military and government side of your business, does that open doors for you on the US military or NATO-type countries by having that presence?

I guess it can't hurt, I think the idea of bringing Willy on was to – as we move into these new markets, we wanted some council as to not only the technology, but how the business is conducted. So, I think he can – will be helpful as to directing us in that regard. Just having him on the board doesn't mean we're going to start getting orders. That’s just not the way it works, but I think it will be a different benefit for us. We’re really excited to have him on-board. We think he really brings a lot to the table for us. I kind of look at his background, it really is just perfect for what we need right now.

And are you forecasting any need for your ATM use on your preferred? Or are we at a point now with the prospects lying in front of you that – that’s pretty well closed off, you don't need to use that?

I wouldn't, there’s not much left on ATM frankly. I wouldn't necessarily preclude that we wouldn't kind of finish it up, but it’s not big dollars at this point.

Okay. And on some of these deals that you’re going after, are you still a secondary subcontractor to a primarily, as we’re seeing, I think that’s well-publicized where you were a sub with Elbit? Or are you getting into a position where you can be a primary bidder for certain say, service contracts or others?

It’s both. We are the prime on at least of one of the projects we're pursuing, but these are both cases.

And is that a first for you?

No. First in few years, but not first.

That sounds good. Alright, thank you.

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

I would like to thank everyone for joining us today, and look forward to talking to you again at the end of our third quarter. Thanks very much.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.