MIND Technology, Inc. (MIND) Q3 2020 Earnings Report, Transcript and Summary

Greetings. Welcome to Mitcham Industries' Fiscal Year Third Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ken Dennard.

Thank you, operator. Good morning, everyone, and welcome to the Mitcham Industries' fiscal 2020 third 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 the call over to management, I have the normal housekeeping details to run through. If you'd 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 until December 12. Information on how to access these replay features was provided in yesterday's earnings release. Information reported on this call speaks only as of today, Thursday, December 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 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 its annual reform on 10-K for the year ended January 31, 2019. Furthermore, as we start this call, please also refer to the statement regard 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. And now with that behind me, I'd 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 third quarter conference call. I'll begin by making some general comments about the third 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. Now let me begin by making a few brief comments about the quarter. The third quarter was a market improvement sequentially and slightly better than our recent expectations, not just in revenues, but in operating income, adjusted EBITDA and net earnings as well. On a sequential basis, revenues were up 20% from Q2 levels with strong contributions coming from Seamap and Klein, as well as the Equipment Leasing business. While seismic leasing conditions are still challenging, we are seeing an uptick in certain markets and there are some more favorable opportunities available within areas such as South America and Europe. Looking more closely at third quarter results, the Marine Technology Products segment drove most of the upside sequential gains. Order flow has been solid and has mostly tracked with our expectations. As you'll recall, we had several news releases last month, announcing deliveries and orders of products based on our proprietary MA-X sonar technology as well as our BuoyLink 4DX RGPS systems. These orders will benefit both the current fourth quarter and fiscal 2021, and further confirm the traction and increasing awareness we are gaining in the oceanographic, hydrographic, defense, seismic and maritime security industries. While there are opportunities for expansion both through new customers and new applications of our technology, there continues to be the overhanging issue of customers' capital availability at least in the seismic industry. As we mentioned in Q2, Seamap source controller orders have come in below our projections both due to more restricted capital and overall global economic uncertainty. Though these potential orders have been delayed due to industry headwinds, we believe these orders will eventually materialize. Now despite the near-term challenges, we are pleased with the overall health of the marine market and are very excited about the many opportunities available to us through our Marine Technology Products. With that, let me now turn the call over to Rob.

Thank you, Guy. I'll begin as usual by making – giving a more detailed review of the financial results, then I'll make some comments about our views on the current and near-term market. Let me start with the Marine Technologies Products segment. Revenues for the segment totaled $8.1 million in the quarter down 13% from $9.3 million in the third quarter a year-ago, but up 20% from the $6.7 million in the second quarter of this year. Seamap revenues rose year-over-year to $5.7 million in the quarter or $5.5 million in the third quarter 2019 and up 16%, sequentially. Third quarter revenues from Klein were $2.4 million, a decrease from $3.1 million a year-ago, but up 29% sequentially. Of the year-ago period included the delivery of both at the source controller system as well as the sonar system for the Dutch Navy, as you may recall. In the Equipment Leasing segment, revenues decreased to $2.6 million in the quarter compared to $5.4 million in the third quarter a year-ago. Although, the year-over-year decline was due mostly to lower seismic equipment sales, there also was a decline in leasing revenues. On a sequential basis, the segment was up 21% driven by higher leasing revenues. Now let me discuss the profitability of each of the segments. Third quarter gross profit for our Marine Technologies Products segment was $3.3 million, which was down from $4.4 million a year-ago, but up from $2.8 million in Q2 of this year. This represents a gross profit margin at 41% compared to 47% in last year's third quarter and 42% in the prior quarter. The slightly compressed margin is a result of higher cost decline related to the introduction of new products along with some changes in product mix at Seamap. In our Equipment Leasing business, we again posted year-over-year reductions in our depreciation expense due to our ongoing asset rationalization strategy. Depreciation expense in the third quarter was nearly half to $1.2 million from $2.2 million a year-ago and was flat sequentially. Gross profit in this segment for the third quarter was $738,000 versus $851,000 in the comparable year-ago period and $46,000 in the second quarter this year. Our general and administrative expenses were $4.7 million for the third quarter of fiscal 2020 compared to $5 million for last year's third quarter and $4.8 million for this year’s second quarter. Year-over-year improvement reflects lower cost due to both strategic restructuring activities as well as the sale of our SAP and Russian subsidiaries. Our research and development expense was $629,000 this quarter, compared to $175,000 spent during last year's third quarter and $498,000 last quarter this year. These expenditures have risen due to our focus on new product development. R&D expenses have tracked higher, as we continue to develop our MA-X technology as well as other initiatives in response to requirements from our commercial and military customers. We are also pursuing a number of initiatives to partner with others to expand our technology and product offerings. Our overall operating loss for the third quarter this year was $1.9 million as compared to the operating loss of $349,000 posted in the year-ago quarter, but improved sequentially from $3.1 million loss in the prior quarter this year. Our third quarter adjusted EBITDA was $198,000 profit this quarter, compared to a $3.4 million profit on last year's third quarter, and a $952,000 loss during Q2 this year. Mitcham's capital structure remains debt free and liquidity remains good. At the end of the quarter, we had about $23.5 million of working capital that included cash and cash equivalents of about $4.8 million. I'd also like to note that our balance sheet as of – in the quarter reflects about a $2.3 million increase in accounts receivable that was driven by order deliveries taken place during the month of October. It's also worth noting that with the recent uptick in land leasing activity in some areas, we took the opportunity to redeploy some capital into new land model technology. We expanded our Equipment Lease agreement with INOVA and reinvestment about $2 million of the capital we freed up in recent periods by selling lease pool equipment. This new equipment was immediately deployed on multi-month lease and it’s currently on a project in Europe. Now let me make just a few comments about our near-term outlook. Although source controller orders continue to track below our expectations, the Marine Technologies Product segment as a whole is performing well and it's largely been in line with our recent forecast. Our firm order backlog of $12.5 million at the end of the third quarter decreased from the second quarter backlog of $14 million, but it’s still more than double the $6.1 million backlog from a year ago at this time. We think the slight decline from the last quarter is more indicative of project timing rather than a broader decline in overall demand. We are still seeing healthy levels of customer interest and are pursuing a number of inquiries for technologies such as BuoyLink, SeaLink and MA-X as well as for our source controllers. MA-X technology in particular has enabled us to differentiate ourselves in the marketplace and gain a solid foothold into new military and commercial markets that previously had been unavailable to us. Our recently announced contract to install MA-X on a next-generation underwater vehicle represents an important milestone in the progression of our expansion strategy and a growing recognition of the unique benefits of our technology. We firmly believe that we will be able to further leverage our technological expertise expanding these markets as our products getting greater traction and awareness. For our Seamap business, SeaLink should make a solid contribution in the current fourth quarter due to anticipated deliveries of towed streamer products. Regarding the reduced order flow for source controllers, we continue to pursue opportunities in the market and remain optimistic that we will land these orders. However, given the lengthy lead times for certain third-party components necessary for these larger systems, that will likely take place sometime in fiscal 2021. Klein is continuing to fulfill deliveries for its recent order bookings, including products utilizing this MA-X sonar technology. We are also continuing to pursue certain governmental programs that can yield sizable opportunities that can span multiple years. For the Equipment Leasing business, overall market conditions remain relatively weak, although there is an increase in activity in certain markets. In South America, activities seem to be slowly recovering, and there are opportunities in Europe. Therefore, we expect to see marginal sequential improvement in the fourth quarter. For the current fiscal year, we continue to expect solid improvement over fiscal 2019 and fully anticipate that we will exit the year generating positive operating income and adjusted EBITDA in Q4, setting a strong trajectory for fiscal 2021. With that, let me turn things back over to Guy for few closing comments before we take your questions.

Thanks, Rob. The third quarter largely performed as we expected. And although customer budgets in some market segments remain tight, we are on track with our strategic plans to build on our momentum in the marine technology space and are excited about where we are headed. Our ongoing efforts to add new technology and products to our portfolio and execute on growth plans in our current markets and expand the markets for our existing product base will strengthen our competitive position in the industry and enable us to access more opportunities for growth in the coming years. As testament to these actions, you need only look at to the orders we've obtained through the year that were driven by our newer products such as MA-X and SeaLink. These orders were previously have been unavailable to us as we not taken the proactive steps to transform Mitcham, recast the company as a Marine Technology provider, and invest in the appropriate technologies to address market needs and attract new business. Our focus going forward will be the continued improvement of our Marine Technology segment via new product development and enhancements to our existing product line. The pursuit of multi-year government programs and the creation of business alliances to leverage the technology, products and markets of other parties in helping further expedite our expansion into marine markets worldwide. That concludes our formal remarks. We'll be happy to take any questions now.

Thank you. [Operator Instructions] Our first question is from Tyson Bauer with KC Capital. Please proceed.

Good morning, gentlemen.

Good morning, Tyson.

Good morning, Tyson.

Rob, just looking for a little clarification on your quote in the press release about positive EBITDA, positive operating income in the fourth quarter. We believe we can maintain this in fiscal 2021, given the seasonality of your leasing side and the $12 million in firm book orders, to make that comment, it seems like the pipeline for you is much larger than maybe you expounded on to suggest that we can maintain those levels going into next year. Just give us…

Yes. I think it's fair to say – yes, I understand your question. There is some seasonality in the leasing business, but it's not what it used to be. And we're seeing that even itself out. So the swings out of the leasing side aren't as dramatic as we've seen in the past. But more importantly, I think the order flow that we're seeing and the inquiry flow is quite strong across the technology products group. So if you – the backlog is double what it was this time last year. So it was like $6 million at this time last year. So that gives us good confidence that we see things really starting to continue on a much stronger front. And if you think about it, we've got two products basically right now that we're shipping and contributing that we didn't have this time last year. That's MA-X and SeaLink. We had not shipped any newbuild SeaLinks as of this time last year. So that's – both those things are having a big impact. So all those things combined give us the confidence.

Okay. And just backing into how you get to operating income profitability. Excluding any unusual activity in lease pool sales, if we're only looking at a marginal bump in the leasing side, you're looking at a fairly dramatic increase in the marine tech product revenue line compared to last year, what you did, what, $6.9 million. You're looking closer to $12 million or around that, which just kind of correlates with what the firm book was out of the third quarter. It also implies that you have to backfill a lot of that going forward to maintain the level. Is that what you're seeing in the marketplace? And is that across the board many products, a lot of inquiries? Or are there some large contracts that you have pegged that can get you to your targets?

I'd say it's more across the board. I can't point to any one or two particular prospects that are key to make it all happen, so it's really across the board. There certainly are some more significant opportunities out there, which I think would be additive to what we're thinking about right now, but it's really across the board. And if you kind of look at where we've maintained backlog the past quarter, it kind of indicates that we are backfilling that pretty quickly.

Klein margins, you're doing new product introductions, you got additional costs there. What are you looking for as getting back to a normalized level? Or where do you – where should we expect that to get to?

Well, I think we start going back to where we were a year ago, the higher 40s for gross margins. I mean I think that's where it's headed [indiscernible] incremental to say that had a big impact if you have some fixed cost.

Your enthusiasm and this expected inflection point on the financials is not getting reciprocated in your stock value and the value of the company. Is it your belief that with this inflection point on financials, you also reached an inflection point for the company in regards to growth, sustainability on your cash flows, the not needing capital, those kind of things going forward? Are we putting a lot of eggs into this one quarter?

I wouldn't overstate that. I think we feel good about the quarter, but we feel really good about things longer term as well. So if something were to happen unexpected, yes, it'd be disappointing, but I don't think that dampens our enthusiasm whatsoever. We have a lot of things in the works. We've talked about some of our partnering opportunities that we really haven't expanded fund yet for obvious reasons. There's some pretty exciting things that we're looking at right now. We feel pretty cocky right now.

There's a lot of press on unmanned vehicles for the U.S. Navy and the Marines, whether it's Overlord for the large vessels to common unmanned vessels at the lower end with Textron, General Dynamics, those kind of guys that are getting fast-tracked contracts without being put up for bid through innovation units in that within the U.S. Navy. Are you part of that segment that is in those fast-track contracts that don't go up for bid? And you've expensed two press releases in the last two weeks with the MA-X technology and related to the U.S. Navy. Give us a little more color on what you can or why we should keep a close eye on that and why that can be a game changer for you.

I mean, obviously, I can't say a lot about specific programs for obvious reasons, both security and competitive reasons. But you're right. The unmanned vehicle market is growing very rapidly. So we certainly see that as a big opportunity for us in several areas. So I guess just suffice it to say that while I can't talk about some specifics, we are involved in unmanned vehicle programs. And I think the MA-X technology, in particular, opens lots of doors for us because it is unique.

And Tyson, let me add one more comment. Tyson, a lot of the R&D expense this past year, particularly with MA-X, is focused on underwater vehicle applications. So we've got a tow body, a tow fish expression, but also a vehicle. So we have invested pretty significantly in that space and we're starting to see things pay off.

Okay. And similar contracts that we've seen across the pond, we've seen $20 million, $30 million contracts, multiyear-type situations be announced, whether they're fulfilled or not, we'll wait and see. Is that the kind of opportunity you're looking at potentially?

I hesitate to be too specific, but everyone knows what these programs can look like. They can be multiyear. And once you're in, you're in for an extended period of time. So it's certainly going to have a big impact.

All right. Thank you, gentlemen.

You bet.

Thanks, Tyson.

Our next question is from Ross Taylor with ARS Investment Partners. Please proceed.

Thank you. Gentlemen, I'd like to pick up a little bit on Mr. Bauer's comments and questions. It's my understanding that the Navy was working on a vehicle where they had down-selected two potential primes, both of which were required to use your, I believe, it was your MA-X technology. And I thought I read somewhere that they had reduced that to one prime. Is that the case?

Ross, we really can't comment on specifics about that program. I think we've kind of said what we can tell you about that. Again, there are, again, some security issues as well as competitive issues that really keep us from saying too much more about that.

Okay. How unique is your MA-X technology?

It's extremely unique. We've patented it. It is game changing technology and certainly from our perspective and from the industry's perspective. Again, nobody else has a product that has this capability, particularly when we made it with the traditional side-scan sonar.

Yes. So it looks like – I mean, obviously, there's potentially a huge military market, both autonomous vehicle and towed, but also scientific and commercial markets, and to seem reticent to talk to us about how really significant the military market here, at least in the U.S. is, can you talk to us about how big the commercial market is and what kind of – what's the selling cycle like? It looks like you do the math from things I've read about the system, it looks like it actually probably saves about 40% on the pass rate, number of passes needed to cover an area.

Yes. That's exactly right.

Okay. And so as a result, I mean, quite honestly, you look at some of these things particularly deep weather – I worked for a defense contractor when the air launch cruise missile was built, and that was relatively easy. All we had to do is develop the effectively GPS system, which had not existed before and was actually built to allow air launch cruise missile targeting, not allowing you to find your nearest grocery store. But there is no ability to do that under sea without mapping, and so it strike me as the mapping opportunities are huge going forward. And this – having such a significant advantage on a much lower pass rate would be something that there should be a substantial market opportunity for, particularly as the Navy decides it needs to map pretty much anywhere it wants to use an autonomous vehicle, underwater vehicle. How big is that market?

It's very large, hundreds of millions of dollars, if not more, potentially. We address all aspects of it and maybe not yet. The thing that you mentioned the commercial market, I mean we haven't talked a lot about that in this call. Commercial market is different in that should not be multiyear – well, multiyear programs that you see on the military side. But it's a huge, huge market for survey purposes…

Wind farm development, asymmetry, hydrographic curio survey. There's a lot of pipeline specialties. There's a lot of commercial applications, search and recovery, [indiscernible] whether it's by containers quite frankly, that's what we've been shipping to…

Indonesian airliners, things like that?

That's exactly right. Yes, exactly.

So I mean, the math is so powerful that if the ability to use your system instead of what they're using and things like that is really game changing.

Yes. We think so. We think so. You asked about the sales cycle. Obviously, though, you have to displace something else, in many cases. So that makes it a bit longer, but…

I want to touch on one thing from a technology perspective that we haven't – that we will start talking about for the future. With the angle concerning MA-X in – on a tow fish expression or even on a vehicle, it allows us to look at some other additional technology that we can put on, particularly the vehicle, that supplements and enhances that MA-X – the gap family technology. We're going to talk about that this coming year, again, as we develop some of this additional technology. And again, as we've stated before, MA-X has allowed us to look at this additional technology, whereas without MA-X, we didn't have the capability to do that. So again, we're working on some additional exciting things based around our MA-X technology that we're going to be talking about in the future.

And you talked about it, I think that – I'm glad to hear you say talking about things because I think one of the biggest problems that I see with Mitcham as an investment is you guys have not been talking enough about what the opportunities. I mean simply put, to me at $25 million, $26 million market cap. One day, someone perhaps the people in front of us that's going to take this company away just as it starts to ramp. I mean it's – the valuation in the marketplace is really head scratching to me. The recent price action is equally head scratching to me because its people focusing on a one quarter rollout or pushback in profitability, it seems. Bob, we were talking about when I saw you at the Sidoti Conference, I really think we – you guys need to focus on giving investors enough information to value this company fairly because if not, one day, someone's going to walk in and offer us $5 to $6 a share for this and investors are going to fall over themselves, selling them stock. And in reality, if the opportunities are as you would seem to believe them and as we would believe them, that's going to be a really unfortunate day.

Got you. Okay.

Okay. Otherwise, thank you. Keep up the good work and do what you can to speed up the sales cycle.

You got it, Ross.

Thank you.

Okay. Take care.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

I'd like to thank you everyone for joining us today, and we look forward to talking to you after our fourth quarter and full fiscal year-end results next year. Thanks very much.

Thank you for your participation. This does conclude today's conference. You may disconnect your lines and have a wonderful day.