Mind Technology, Inc (MIND) Q2 2023 Earnings Call Transcript

Greetings and welcome to the MIND Technology fiscal 2023 second quarter conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Vaughan with Dennard Lascar Investor Relations. Thank you, you may begin.

Thank you Operator. Good morning and welcome to the MIND Technology’s fiscal 2023 second quarter conference call. We appreciate all of you joining us today. With me are Rob Capps, President and Chief Executive Officer, and Mark Cox, Vice President and Chief Financial Officer. Before I turn the call over to Rob, 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 mind-technology.com, or via recorded instant replay until September 20. Information on how to access this replay was provided in yesterday’s earnings release. Information reported on this call speaks only as of today, Tuesday, September 13, 2022 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 report on Form 10-K for the year ended January 31, 2022. 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 would like to turn the call over to Rob Capps.

Okay, thanks Zach. I’d like to begin by making some observations regarding the second quarter and on the market environment. Mark will then discuss the financials in more detail. At the end, I’ll wrap up with some remarks about our outlook. We’re pleased to report that our fiscal 2023 second quarter results came in as expected. Revenues were about $8.7 million, which is up 28% over last year’s second quarter and slightly below the first quarter revenues of $9.1 million. Importantly, our operating loss improved to approximately $1.6 million compared to $2.6 million in last year’s second quarter and $2.5 million in the first quarter this year. When compared to the first quarter of this year, we saw an improvement in gross margins coupled with lower selling, general and administrative expenses and lower research and development costs. As a company, we believe MIND is uniquely positioned to capitalize on the tailwinds that we’re seeing in each of our key markets. The sustained global energy prices continued to drive robust order activity in the marine seismic industry. Our marine survey business has also seen an uptick in interest resulting from those same high energy prices as attention shifts towards alternative forms of energy, such as wind farms. The ongoing global geopolitical and security situation has also highlighted the need for our maritime security technology; therefore, we’re optimistic we’ll continue to grow our book of business in the coming quarter as we look to execute on the growing demand. Our backlog as of July 31, 2022 was approximately $19.3 million, which is up from $13.1 million at the beginning of this fiscal year. In addition to this backlog of firm orders, we are pursuing a number of other opportunities for which we have high confidence. These orders reflect the continued positive momentum that we’re experiencing in various markets, and we believe that our products are uniquely positioned to benefit from the strengthening macroeconomic environment. As I’ve mentioned previously, we believe there is positive momentum in each of our three key markets - that’s exploration, defense, and survey. Strength in global energy markets is driving demand in the exploration space as many of our customers are reporting improving metrics and, in some cases, looking to expand their fleets. That’s good news for us. GunLink, BuoyLink, and SeaLink products continue to enjoy broad acceptance in this space. Activity surrounding alternative energy products such as offshore wind farms is resulting in increased demand within the survey market. In addition to our single beam and multi-beam side scan sonar systems, we’re seeing much interest in our SeaLink towed streamer systems for these applications. We recently introduced higher sampling rates for SeaLink, which produces higher resolution images. That resulted in increased interest in these three-dimensional high-resolution systems. The global geopolitical situation, particularly in Europe and Asia, has resulted in increased interest in maritime surveillance and security systems. We have recently experienced increased order activity particularly for our multi-beam side scan sonar systems, which we believe is related to these demands, and we also think this bodes well for our program to utilize our commercially developed towed seismic arrays at SeaLink as passive sonar arrays and anti-submarine warfare and other maritime security applications, particularly those for utilizing uncrewed platforms. Now let me turn over to Mark and let him walk you through our second quarter financial results in a bit more detail.

Thanks Rob, and good morning everyone. As Rob mentioned earlier, revenues from continuing operations totaled $8.7 million in the quarter, a 28% increase when compared to the $6.8 million in the same period a year ago. Gross profit from continuing operations in the second quarter was $3.5 million, up approximately 59% when compared to the second quarter of fiscal 2022. This represents a gross profit margin of approximately 40% for the quarter, which is up from the 33% we achieved during the prior year second quarter and the 36% reported in the first quarter of this year. The improved margin during the quarter was attributable to further reductions in expenses and greater absorption of fixed costs as a result of higher sustained revenue levels. Our general and administrative expenses were $3.8 million for the second quarter of fiscal 2023, which was down from $4.3 million in our first quarter. As we mentioned last quarter, our G&A expenses tend to taper down as the year progresses. Much of the expenses that we incurred earlier in the year were associated with front-end-loaded professional and travel fees. Our research and development expense was $844,000 for the second quarter, which was down nearly 17% sequentially. Consistent with prior periods, these costs are largely directed towards our strategic initiatives, including synthetic aperture sonar and passive sonar arrays. Our net loss from continuing operations for the second quarter of this year was $1.7 million as compared to a $2.7 million loss in the second quarter of fiscal 2022. Our second quarter adjusted EBITDA from continuing operations was a loss of $1 million compared to a loss of $1.8 million in the second quarter of fiscal 2022 and $1.9 million in the first quarter of this year. We see this as a significant improvement indicating a positive trend. As of July 31, 2022, we had working capital of approximately $15.6 million and cash of approximately $833,000. We continue to have no funded debt or outstanding obligations aside from normal trade obligations. Also, our cost structure remains largely variable, which gives us flexibility to respond to changes in market conditions. I’ll now pass it back over to Rob for some concluding comments.

Thanks Mark. We’re encouraged by the orders we’ve received to date as well as the robust interest and customer engagement that we’re continuing to see. We think these factors and the market trends I discussed earlier are strong indicators that we’re on the right path. This also gives us confidence that our financial performance will continue to improve and that results for the second half of fiscal 2023 will exceed those in the first half. Based on current delivery schedules, it is likely we’ll see a fall-off in third quarter as compared to the second; however, we then expect significant improvement in the fourth quarter. Should those expectations be met, we believe MIND will report a profitable fourth quarter with positive income from continuing operations. Of course, this is not without challenges and risk. Supply chain issues, changing delivery requirements, government contracting processes, technical and production challenges are all things we must deal with every day and that impact production and deliveries. Nonetheless, we feel good about where the company sits today and believe these positive market trends will continue in future periods. We also believe we will enjoy increasing contributions from our development programs. As you know, last quarter we made the decision to defer payment of the dividend on our preferred stock. As we said at the time, this was done to preserve our financial flexibility and ability to fulfill current and expected orders. We do expect to resume payment of dividends, including any previously deferred, at some point but have not yet made a decision as to the timing of that. We remain unwavering in our belief for the future of MIND Technology and think we are beginning to demonstrate that potential with increasing order flow and improving financial performance. With that, Operator, we can now open the call for some questions.

Our first question comes from Tyson Bauer with KC Capital. Please proceed with your question.

Yes, good morning gentlemen.

Hey Tyson.

Just a couple of quick questions. Are you still maintaining your revenue expectations - approximately high 30s, $40 million on the top end for this year? Obviously given all the variables that could change the schedule of this, is that still kind of your inkling to put out there as an expectation?

Yes, I think it’s in the ballpark. Again, we expect the second half to be better than the first, so we kind of did the math on that, so that’s definitely in the ballpark.

Okay, is it a timing issue with Q3 and Q4? The projection of a $14 million quarter in Q4 should not be taken too literally, as it depends on the timing and schedule uncertainties between Q3 and Q4.

Yes, there’s some challenges, you’re right. There’s some relatively large orders involved, and so it slips a week and it can have a big impact.

Okay. Any time you have large orders or a big quarter expectation coming up, obviously you have the working capital requirements that are built into that. You’re not necessarily in a great position, you’ve had some aces up your sleeve that you’ve been able to do. Just kind of give us that cash management and expectation to meet those requirements to fulfill those large orders without requiring capital, and if you do require capital, does that not necessitate being made whole on those preferred dividends, which you would like to do maybe early next year, so how does that tricky timetable work out that we want to be able to do those large contracts, but we may need capital to do so, which means that we really should be current on our preferred dividends?

Yes, I understand. There are various things we’re looking at, Tyson. You’re right - managing liquidity is important for us right now because big orders do require capital, working capital to execute. So things we’re looking to do is managing working capital - we still have significant working capital in the form of receivables and inventory, so we’re able to monetize that to some degree. Some of the contracts, pending contracts, we attempt to negotiate pre-payments in some cases to help mitigate and fund those purchasing requirements for those contracts. We continue to look to try to monetize some non-strategic assets such as the remaining lease pool assets. We also have some owned real estate that we think there are opportunities to monetize in a non-dilutive way, so those are kind of the top things. As you’ve noted, we also consider do we go look for outside capital, so that’s something just out of prudence we want to consider and look at on a regular basis. Obviously, our aim there is to avoid or at least minimize any dilution that might come from that, so that’s at the forefront of our mind. As it ties into the preferred dividends, that may or may not be a factor. As I said earlier, we definitely intend to reinstate those and get those current, again we just need to look at the timing of that as it factors into all these other issues.

Well, seeing as financially your first realistic opportunity to make those current would have to be post this fiscal year or after fourth quarter, where you’re probably in a better financial position?

Potentially, potentially. But again, if we’re able to monetize some of the other assets, it might be sooner than that.

Okay, that would be wonderful. Your European JV status, obviously a lot of location-wise would dictate that you’re probably utilizing that relationship with some of your European opportunities, especially with the geopolitical events that you talked about. Do we start to see those revenues in that Q4, or is that really a next fiscal year situation?

Thanks for that. The joint venture is more next year than this year. There could be some this year, but probably more next year. There are benefits from the geopolitical situation in Europe that I think we’re already starting to see, that they’re not necessarily tied directly to that relationship, so there are other opportunities for us outside of that as well.

So everything we’re seeing right now is just on your own cognizance or your own ability? We have yet to even see the benefits of that JV play out?

I think that’s a fair statement.

Okay. Backlog, 19.3. You also said that there’s a significant amount of what you would call high confidence that may not necessarily be in that number, but you’re fairly certain or feeling good about. I’m guessing you’re not going to give me a hard number, but give us a sense of what that implies. Is that something that could increase that backlog 50%, 30%, something in that ballpark?

It’s a significant amount. Again, the timing for deliveries varies to a large degree. A lot of that, almost all of that, actually, will be going to next year, I would say, but it’s a comparable number to what we’re seeing in the backlog. And understand that there’s a whole litany of different probability and different size and timing of these orders, so things we’re pursuing are early stage, others are a lot firmer in our mind; and the ones I’m trying to refer to are things that are much firmer in our mind.

Okay. Obviously the backlog of 19.3 to be able to hit your revenue targets, that must be all that you anticipate being delivered this fiscal year?

Not quite all of it, but the majority of it, the vast majority, yes.

Okay. Are we getting later in the year where new orders fall into the next fiscal year, or are you capable of receiving new orders and delivering this fiscal year?

Oh, for sure. We can certainly receive orders and deliver in a couple of weeks, and we have lots of that. I think as far as any very large systems, especially on the seismic side, those will tend to go into next year just because of lead times for certain components, certain aspects of the systems. But yes, we certainly are able to have a book-and-bill business; you know, spare parts, smaller systems, things like that, most definitely.

Servicing, all those things. Last one, kind of give us a little more color on that pipeline. You described that survey is really picking up, obviously defense given the climate we’re in, is very positive, and then energy prices at maintained elevated levels. So when you’re looking at that pipeline, how are you breaking that down between defense, seismic, survey?

It’s really across the board. Obviously from our market position, we really had a strong position in the seismic side, the energy side, so we’re seeing a lot of benefit there. In some areas, we really have no competition, so that’s a real benefit for us. But we’re seeing a marked uptick in the survey space, especially very recently. I think the application of our SeaLink product in that area is really getting some interest right now, and of course we’ve talked a lot about defense, and that’s kind of across the board.

Got it. That sounds great, gentlemen. Thank you.

Yes.

Thank you. Ladies and gentlemen, as a reminder, if you’d like to join the question queue, please press star, one on your telephone keypad. Our next question comes from the line of Ross Taylor with ARS Investments. Please proceed with your question.

Thank you. It’s always hard to follow Tyson because he leaves so much uncovered. A couple of things. One, obviously with the stock price trading where it’s at, equity issuance is really not an option. It would seem to me that you’d be better off to consider the strategic alternative of selling the company, as opposed to trying to issue equity at what would basically be such an incredibly low price, it would just dilute the hell out of your shareholders. That’s a comment. Second, you commented on the idea of the towed array opportunities in defense using SeaLink and the like. Was that an incoming concept? Is that a concept that others, you know, defense agencies and other countries, perhaps, or in the U.S. have come to you and said, we think this works, or is this something you guys have looked at and said, maybe it works?

Early on, we considered the potential of our commercially developed, robust system for various applications. The driving force behind this is the use of uncrewed platforms, which are smaller and more cost-effective than traditional sonar arrays that can cost millions of dollars. While this is still an emerging concept, it is gaining significant interest both in the U.S. and internationally. Recently, we conducted a demonstration with the U.S. Navy, and although we have not seen any contributions from that yet, it could prove to be very promising for us in the future.

Okay, and as you mentioned, this applies to both unmanned surface vehicles and unmanned underwater vehicles?

It’s more surface vehicles, I think is the initial application. Conceptually, yes, but I think due to some technical issues, it’s more likely to be applied on unmanned surface vessels initially.

Okay, cool. Also, while Tyson asked a question about the fourth quarter, basically probably in some ways better to look at the second half as a half, do you see this fourth quarter being strong enough to pull the second half overall into profitability, and do you believe that it sets the stage so that the 2023 calendar year should be a year in which we actually see positive EBITDA and positive profits, in essence the company kinds of switches over from the perpetual loss building to the income generation phase?

It’s possible that we’ll see the back half positive. I think it’s a closer call on that, but that’s certainly within the realm of possibility. I do think that that’s going to set the stage for a higher base level of business going forward, so we’re going to get out of this, as you say, this perpetual loss. I’m not saying we’re not going to have some ups and downs from quarter to quarter - that’s certainly going to be the case as long as you have large orders, but I think it is going to set the stage for recalibrating where we are.

So after years of struggling, you believe that in 2023, this is the year we finally move past these challenges?

That’s what I think. That’s what I think, Ross.

That would be a significant achievement if it could happen. Do you see any potential issues? It appears that we are likely to end up with some type of continuing resolution in Washington. Will any of the programs you are working on be adversely affected if Congress fails to reach an agreement on a new defense budget?

I think for things that are near term, no. Hard to say - you know, some of the things are a little farther out and it might have some impact. It’s really hard for me to comment on that. Don’t know for sure, but I think as far as anything that’s near term that we’re counting on, I don’t see an issue there.

Congratulations on the improved quarter. I hope that this signals our transition into profitability in ’23, which would be a welcome development for shareholders who have shown great patience over time. It would be wonderful to see that patience rewarded with real progress, so thank you and please continue the good work.

Okay Ross, appreciate it.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I will turn the call back to management for any final comments.

Okay, I’d just 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.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.