MIND Technology, Inc. (MIND) Q3 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to the MIND Technologies’ Third Quarter 2022 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, Ken Dennard. Thank you Mr. Dennard. You may begin.

Thank you, operator. Good morning and welcome to the MIND Technology fiscal 2022 third quarter conference call. We appreciate all of you joining us today. Your host today is Rob Capps, President and Chief Executive Officer. Before I turn the call over to Rob, I have a few house-keeping items to go through. If you would like to listen to a replay of today’s call, it will be available for 90 days via webcast by going on to the Investor Relations section of the Company’s website at mind-technology.com or via an instant replay telephonically until December 16. 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 09, 2021 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 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 Report on Form 10-K for the year ended January 31, 2021. 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’d like to turn the call over to Rob Capps. Rob?

Okay, thanks Ken. I’d like to begin by first making some observations on the market environment before I discuss the financials in detail. And I'll then wrap things up with our general market outlook. As you may gathered, based on earlier pre-release, we are seeing a noticeable improvement in market conditions, with a growing activity in the marine industries driving a corresponding uptick in our orders. Assets, the favorable trend we observed in Q2 remains intact, with increasing inquiries in order activity spanning most of our markets and driving strong sequential top line gains in Q3. We have made additional progress on the disposal of assets from our legacy leasing business. As you may remember, from our prior call, we entered an agreement to sell a substantial portion of these assets. We also continue to make good progress on our strategic initiatives, which target growth areas in the marine technology space, such as synthetic aperture sonar, passive sonar arrays, and sensor systems for unmanned platforms. With conditions and activity improving, we have considerable optimism for our business in the coming quarters. However, I would also note that with external factors, such as the new Omicron COVID strain, and supply chain disruptions casting a shadow over economic activity worldwide, our optimism must remain tempered. As I've mentioned in the past, our quarter-to-quarter results can swing quite a bit due to changes or delays in customer orders. With the uncertainty in the global economic environment, things can change rapidly and significantly. That said, we believe the underlying fundamentals of the rain market are improving, and we expect this to hold for the foreseeable future. Looking at our third quarter results, consolidated revenues are up strongly both year-over-year and a sequential basis. When compared to last year’s third quarter, our total revenues were up by more than 27%, and on a quarter-over-quarter basis, they were up by 23%. Due to the delivery of some of our pending orders during the quarter, our current backlog of $10 million is down from our Q2 backlog of 11.7, though still up from the 8.2 million backlog posted in Q3 of fiscal 2021. However, we fully expect additional orders in the near future, as customer interest and engagement continues to be quite robust, both in commercial and military markets. Based on engagement with specific customers, we are confident of two significant orders in the coming weeks. We're still seeing strong levels of inquiries and bid activity within our three primary markets, those being marine survey, marine exploration, and maritime security or defense. In the Marine survey space, we have noticed an increase in inquiries and bids for both our single and multi-beam sidescan sonar systems. I believe that this development is poised to drive improvement in Q4 and the coming year. In the Marine exploration market, our source controller and positioning products continue to lead the market. There are a number of opportunities in this segment. And one of the expected orders I just mentioned is in this space. Although most of our revenue is currently derived from commercial activity, we believe that the defense or the maritime security market represents an outstanding growth opportunity for MIND. We are working diligently to build on and expand our presence among military and governmental organizations. We have multiple opportunities for multi beam sonar systems for MCM, that’s Mine Counter Measure applications. The other order that I mentioned a few moments ago is in this particular space. We think these opportunities will expand in coming months with the introduction of our synthetic aperture sonar solution. As you're already aware, global supply chain disruptions continue to weigh on companies around the world. We noted these challenges even before it became more omnipresent throughout the economy, and are continuing to manage through the bottlenecks that have arisen because of COVID, rising demand and scant supply. The shortages of certain components and materials, a surge in freight charges and prolonged shipping delays, a degree of risk is introduced into all financial outlooks. We've been working to mitigate these risks as much as possible and believe these issues are temporary and will be resolved in time. We're also moving forward on our strategic initiatives. The development of our synthetic aperture sonar system, in partnership with our European defense contractor partner continues to progress. Supply chain issues have had some effect on our schedule. We are still hopeful to generate revenue from this project in the fourth quarter with more activity next fiscal year. The development of our passive sonar arrays for anti-submarine [Indiscernible] -- and maritime security applications continues to advance as our prototype systems have been deployed, and we continue to add functionality. These arrays are based on our successful SeaLink product line, which is widely recognized and well established in the commercial marine market. And as I mentioned earlier, we've also seen a recent increase in inquiries and bids for single and multi-beam sonar systems. This bodes well for our ability to play a bigger role in providing sensor systems to the burgeoning unmanned vessel market. It also helps address both commercial and military marine markets demand for higher resolution sonar images. We are continuing to develop solutions that address these critical market needs, either through our internal development of new technologies, the application of our existing technology into new products, strategic partnerships, or some combination thereof. As an example, we recently launched a new product in a space what we call the 4K-SVY or 4K Survey. This has been well received and we're starting to see order activity for it. Okay, now, let me walk you through our third quarter financials in a bit more detail before I make some summarizing comments. As I mentioned earlier, revenues from our continuing operations totaled $8.3 million in the quarter, which was up 23% sequentially, versus $6.8 million in the second quarter of fiscal 2022. When compared with our year ago revenues, this was an increase of 27%. Third quarter gross profit from continuing operations was $3.2 million, up from $2.2 million in Q2. This represents a gross margin of 38%, which is also up for the 33% we achieved in the prior quarter. The increase reflects the beneficial impact of operating leverage, as higher revenues drove greater overhead absorption. Our general and administrative expenses were $3.9 million for the third quarter of fiscal 2022, which was up from $3.4 million in the second quarter, due to increases in various costs such as employment, travel and professional fees. Now in the quarter, we were able to attend three industry conferences for the first time in almost two years. While that did contribute to some higher cost, it was great to be face to face with customers and to demonstrate first-hand the new strategic direction of MIND. Our research and development expense was about $826,000, which is roughly flat with the second quarter. These costs are largely directed towards our strategic initiatives, such as synthetic aperture sonar, passive sonar arrays, and sensor systems for unmanned platforms, as well as enhancements and upgrades to our other sonar systems. Our loss from continuing operations for the third quarter of this year was $2.1 million as compared to $2.7 million loss in the second quarter of fiscal 2022. Our third quarter adjusted EBITDA from continuing operations was a loss of $1.3 million, compared to a loss of $1.8 million in Q2. For our legacy land leasing business, which of course is classified as discontinued operations, we realized approximately $2.7 million in Q3 asset sales, with an additional $2 million or so expected to be realized in the fourth fiscal quarter. Beyond this, there is some miscellaneous equipment and certain accounts receivable, which will likely be monetized in the next fiscal year. MIND’s capital structure and liquidity remain solid. At the end of the quarter weighed about $14 million from working capital. We continue to have no funded debt. Also, our cost structure remains lean and flexible. Social market conditions take a turn for the worse. We believe that our largely variable cost structure gives us some leeway to reduce our expenses commensurate with any declines in our business. We also have additional sources of liquidity available to us. In addition to the proceeds from the sale of our land leasing assets that I mentioned a moment ago, we also received approximately $9.5 million in net proceeds from an underwritten public offering of our preferred stock, which was completed last month shortly after the close for Q3. These resources combined with the discretionary actions we may take, will give the company versus sufficient liquidity to handle the challenges ahead, while also enabling us to progress in our strategic initiatives and take advantage of opportunities that may arise. So in sum, although difficulties and potential pitfalls remain in the larger macro environment, we continue to hear to the view that on the whole things are improving and the revenues from continuing operations for fiscal 2022 will be an improvement over the prior year, and this trend will continue into the coming year. We have a solid backlog and are seeing strong customer interest in the market this pertains an eventual inflow of orders. It's hard to say where those orders will fall in terms of timing because of supply chain bottlenecks, perhaps some lingering customer apprehension as well. Therefore, our baseline expectation will be for Q4 to be roughly aligned with Q3 but with potential for incremental upside depending on order and production timing in the coming weeks. We're excited about the improving fundamentals that we're seeing in the marketplace. And despite the overhang of the pandemic and supply chain challenges are very optimistic about MIND’s prospects in the coming year. We will continue to execute on our strategy and work towards achieving our long term goals. Now, before we take questions there is I'd like to address something else just for a moment. As I think you all know, Guy Malden is retiring at the end of this month. He would have been here with me today, but he's on assignment in Singapore this week. So the logistics for him to join the call were problematic. Guy has been instrumental in our transformation, going all the way back to our acquisition of SEMA [ph] over 16 years ago. He and I've been partners for the past few years. As we moved from the equipment leasing business into the Marine technology space, we could not have made the progress that we have without Guy. For me personally, his experience, insights and advice have been invaluable, and he's become a good friend. I'm going to miss his counsel and our daily interaction. Luckily, however, I know where he lives, and I have his phone numbers. Therefore, I still plan to lean on him for advice from time to time, and I'm pretty sure he'll answer my calls. All this in mind I want to thank Guy for all he has done and wish him and Cheryl a great retirement. So with that operator, now we can open call up for questions.

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

Good morning, Rob.

Hey Tyson.

I like to also echo those comments you made about Guy except for he may not take my calls.

He may, you never know.

You talked about Q3 being kind of the base level, as we walk into Q4 because of some supply issues, some bottlenecks that are going on there. Are we looking at Q3 as kind of a baseline even beyond Q4, as we eliminate some of the seasonality and some of the lumpiness going forward with these new orders that are expected in backlog? Is that kind of the base level that you're looking for the foreseeable future?

Yes, I think so Tyson. I mean, as you know there's always a risk if you have a one order slide a few weeks, which has an impact. But I think generally speaking, that is kind of where we're looking, and looking to grow from that. I just - the point I think we wanted to make is, given the environment that we're in the supply chain issues, there is risk out there, and we wanted people to understand that risk. I think that is kind of the baseline we're looking at.

Okay, SG&A you've talked about that front running some of the revenue as you tried to build that up to secure - been at the shows those kinds of things. What should we see in SG&A as we go forward, as you try to get some of these orders procured and marketing some of these new products?

I don't see it changing dramatically. You might see a bit of a swing from quarter to quarter, just as things fall in, but I think it's not going to be materially different going forward. So I think the big thing is we'll just have better leverage, as we see the top line increase.

Okay. You sound highly confident on the backlog growth, these orders that are coming in. Will those be announceable, given the nature of the order and who you're working with. And two, are these more technology add-ons to existing orders that we don't have to go through that bid process, but they're now adding your features to maybe their physical product that already exists? And they're building for contract?

Yes and no, in that. Surely there's one kind of like that and -- for the first question. I think they probably will be annouceable, although, what specifics as far as who it is, there might be some issues there. But I think we will be able to announce in general that we have these things in hand. So in all cases, it's not necessarily not add on to existing stuff. There are some new installations involved here, new customers, new areas for us.

Okay, and the SaaS product that you've been in joint development with, has that now been tested and approved by military establishments. So it is just a function of getting orders and adding that technology to unmanned vehicles or other products.

It's in process is a way I’d describe that.

Okay, so that is still something that is we're not…

We're still in, in but you definitely call the development stage, but towards the latter part of the development stages, is the way I’d describe that.

Okay. Given the new costs and the additional preferred, we get some pushback from institutions revenue to cover, that cost now jumps up, probably closer, depending on your variable costs, they're 12 million a quarter is out about right.

And in that ballpark.

We're at eight, that implies a significant amount of growth there to cover that additional preferred costs. Is that something that's in your budget or in your line of sight that now we think we're comfortable and being able to cover that?

It is. It is Tyson.

Okay. These bids and these orders are a lot of these accordion features to them, especially on the military side?

In some cases, yes. But not in all cases, sometimes they roughly are. But in other cases it will be so, it's a mixed bag.

Okay. And we saw the increase in accounts receivable and working capital requirements to do these orders. Sure, inventory will be coming up also. What are you looking at as far as requirements on that, for your cash management and the working capital? As we go forward, are we getting into periods that we're going to be tight on capital? Are we got enough cushion there that that's not a concern anymore?

Yes, I think we have enough cushion. And that's one reason we wanted to do the offering was, we saw the potential need to get out ahead of some of the supply chain issues and be more aggressive in our, in our purchasing. This gives us the flexibility to do that. What we didn't want to have happen is, have a big order come in, and that we just couldn't execute on because if we couldn't get stuff. So in this environment you have to be more aggressive with your suppliers. So that could mean, ordering sooner, putting money down to make sure you're first in line, things like that.

Okay. And are you able to leverage your partner's capability on their procurement or supply that may have a better access to some of these components than yourself?

In some cases, yes. I'd say not across the board that there are some specific instances where we've been able to, to lean on them, and they certainly are helpful in that regard.

Okay. So the way it sounds, we will see some growth in the military side with orders and that, that, promise of that future growth should be realized in the coming quarters or the coming weeks, really in an order, and in the coming quarters as far as results.

Yes, we're definitely starting to see more activity, more traction in that area. I feel good about that.

All right. Thank you.

You bet, Tyson. This concludes the question and answer portion of our call. I would now like to turn the call back over to Rob Capps for any final comments.

Okay, just want to thank everyone for joining us today. And I look forward to talking to you again at the fourth quarter call early next year. Thanks.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.