MIND Technology - Earnings Call - Q1 2021

Transcript

Speaker 0

Greetings and welcome to the Mitcham Industries Fiscal First Quarter twenty twenty one Conference Call. At this time, participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard.

Thank you. You may begin.

Speaker 1

Thank you, operator, and good morning, everyone, and welcome to the Mitcham Industries fiscal twenty twenty one first 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 Mauldin, 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'll be available for ninety days via webcast by going to the Investor Relations section of the company's website at mitchamindustries.com, or there'll be a recorded instant replay until June 18, which is a telephonic replay, and the information on how to access that replay was provided in yesterday's earnings release.

Information reported on this call speaks only as of today, Thursday, 06/11/2020, 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 ks for the year ended 01/31/2020. 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 Guy Maldon. Guy?

Speaker 2

Thanks, Ken, and good morning, everyone. We would like to thank you for joining us today for our fiscal twenty twenty one first quarter conference call. These are challenging, yet exciting times for us, challenging due to the disruptions caused by the COVID-nineteen pandemic, but exciting for the various opportunities we see before us and the rebranding of the company on which we have embarked. We'll talk about that a little bit later. I'll make some general comments about the first quarter.

Rob will then discuss our financial results in more detail. We'll then address our general market outlook and the proposed renaming of the company to MIND Technology Inc. As expected, there were broad based disruptions to our businesses through the first quarter due to reduced activity and general market uncertainty resulting from the COVID-nineteen pandemic. Our first quarter results were down on a year over year basis, with consolidated revenues pulling back by roughly 25%. On a sequential basis, consolidated revenues were down 44%.

For the Marine Technology Products segment, Cline and C Map both pulled back sequentially. C Map accounted for most of the decrease as there were no system deliveries in Q1 compared with both a BuoyLink and a C Link system delivered during the fourth quarter. As you may remember from our previous call, C MAP also had a $2,000,000 delivery that had been delayed due to causing the order to be postponed until the second quarter. So as a result, we saw no benefit from that in Q1, although it does provide some measure of visibility into the upcoming quarter. While there remains a tremendous amount of uncertainty in the marketplace due to COVID-nineteen and other events, there are also encouraging signs, both internally and externally, that we will weather the storm and benefit as the economy recovers.

As we discussed on our last call, our facilities in Malaysia and Singapore were temporarily closed due to government mandated shutdowns. The Malaysian facility resumed operations in early May and is operating at essentially full capacity and working off backlog. In Singapore, we were able to continue limited shipping and receiving operations during the shutdown and were able to resume manufacturing operations as of last week. While we are not yet running to full capacity in Singapore, we expect to build to that over the month of June. Turning to the broader market, I'd like to note that economic weakness notwithstanding, we currently see activity in the marine market and this has been substantiated by an uptick in requests for quotes.

While these favorable fundamentals haven't yet manifested into an influx of new orders, they are a reassuring sign that bodes well for the resilience of the industry despite widespread macroeconomic turmoil. It also attests to our strategy of expanding the Marine Technology business and diversifying away from the more cyclical oil and gas related markets. With that, let me now turn the call over to Rob.

Speaker 3

Okay. Thanks, Guy. I'll begin by giving you a more detailed review of the financial results. Revenues for the Marine Technology Products segment totaled $3,200,000 in the quarter, down 46 from $6,000,000 in the first quarter a year ago and down 63% from $8,800,000 in the 2020. TMAP revenues were down year over year to $2,200,000 in the quarter from $4,300,000 in the year ago quarter and were down 69% sequentially.

As Guy mentioned, there are no large systems deliveries in the quarter compared with both the BuoyLink and the SeaLink delivery made in Q4. First quarter revenues from Klein were $1,200,000 a decrease from $1,600,000 a year ago and down 27% sequentially. We believe the disruptions and uncertainty introduced by the COVID-nineteen pandemic and other events have caused many customers to delay spending decisions. In the equipment leasing segment, revenues increased to 4,200,000 in the quarter compared to $3,900,000 in the first quarter a year ago. While leasing operations were down both sequentially and year over year, segment results were lifted by more than $1,400,000 in lease build equipment sales as well as higher other equipment sales.

On a sequential basis, the segment was down 7% driven entirely by the decrease in land leasing activity. First quarter gross profit for our Marine Technology Products segment was $500,000 which was down from $2,600,000 a year ago and down from $4,400,000 in Q4. Now this represents a gross profit margin of 15% compared to 43% in last year's first quarter and 50% in the prior quarter. The decrease in margin was a result of higher amounts of unabsorbed manufacturing overhead due to the lower revenues. In short, revenues dropped precipitously, but the adjustment from a cost standpoint necessarily entailed a delay, resulting in a greater level of unabsorbed cost.

In our equipment leasing business, depreciation expense in the first quarter was down to $926,000 from $1,400,000 a year ago and was down 23% sequentially. Gross profit in the segment for the first quarter was $1,700,000 versus $1,300,000 in the comparable year ago period and $1,600,000 in the fourth quarter of last year. Our cost containment efforts continue to yield meaningful benefits as our general and administrative expenses were $4,700,000 for the 2021, which was down 11% year over year and 7% sequentially. Our research and development expense was $410,000 which was essentially flat with both the year ago quarter and the fourth quarter of last year. Like many of our peers in the recent quarter, we recorded an impairment charge related to our remaining goodwill.

This charge, which amounted to about $2,500,000 was precipitated by the deterioration in macroeconomic conditions and the decline in the market value of our equity securities during the quarter, the recent recovery of those values notwithstanding. Absent this non cash charge, our overall operating loss for the first quarter this year was $3,600,000 as compared to an operating loss of $2,500,000 posted in the year ago quarter. First quarter adjusted EBITDA was a loss of $952,000 compared to a profit of $61,000 in last year's first quarter and a profit of $124,000 during Q4 of last year. However, net cash provided by operating activities was a positive $929,000 in the first quarter compared with a $1,900,000 use of cash in the year ago period. Mitcham's capital structure is debt free and liquidity remains solid.

At the end of the quarter, we had about $20,000,000 of working capital that included cash and cash equivalents of approximately $4,700,000 which is up from about $3,200,000 at the beginning of the quarter. As I've mentioned before, we believe our capital and cost structures are well suited to handle disruptions and uncertainty of this current environment and the absence of blooming financial obligations or restricted covenants provides us with a good deal of flexibility. We also have other options to redeploy capital through the further monetization of our lease pool and with a more favorable cost structure, we have the ability to adjust relatively quickly to changes in demand and activity. Looking at the market environment, although the overall tenure is uncertain, we continue to see solid marine activity and a steady flow of inquiries and requests for quotes. While our ongoing customer engagement has been encouraging, adverse macroeconomic environment does weigh on discussions and can lead to delays in purchasing decisions.

But despite these issues, our firm order backlog of $10,200,000 at the end of the quarter is up from the fourth quarter backlog of $8,900,000 With that, I'd like to discuss our reincorporation in Delaware and the associated name change and rebranding. Given the transformation that the company has been going through and the opportunities we see before us, we think now is an appropriate time to recognize the change in a more formal manner and to better position ourselves for the growth we envision. Accordingly, we are asking our shareholders to approve the reincorporation of the company from the state of Texas to Delaware. Concurrently, we plan to rename the company to MIND Technology Inc. As a part of the reincorporation transaction, we are also seeking to increase the authorized shares of common stock to $40,000,000 from $20,000,000 and the authorized shares of preferred stock to $2,000,000 from $1,000,000 We have no immediate plans for the additional authorized capital, but think it's prudent to provide room for future transactions to facilitate our growth.

And as we recently disclosed, we also think it is appropriate to further deemphasize our land seismic leasing business due to our strategic focus on marine technology as well as recent developments in the global energy markets. Accordingly, we've decided to make no further investment in land lease pool equipment and will seek to maximize the value of our existing equipment either through leasing transactions or sales of equipment. We're also taking steps to reduce the cost structure of this part of our business to reflect the lower levels of activity. Let me now turn the call back over to Guy for a few closing comments before we take any questions.

Speaker 2

Thanks, Rob. While global economic fundamentals have been a headwind, we remain unfazed and continue to adapt to the situation as it unfolds while focusing on those critical variables that we can control. This means keeping a strong focus on our costs and operational efficiency, as well maintaining ample liquidity and being judicious in our capital allocation. As we've emphasized before, we will continue to build out the marine technology products segment. And going forward, we are addressing three primary markets: marine survey, marine exploration and maritime defense.

Specific applications within those markets include seafloor survey, search and recovery, mineral and geophysical exploration, mine countermeasures, and anti submarine warfare. We have existing technology and products that meet the needs in each of these markets, including side scan sonar, bathymetry systems, acoustic arrays such as seismic streamers, and marine seismic equipment such as GunLink and BuoyLink. We also see a number of opportunities to add to our technology and to apply existing technology and products to new applications. And despite this global pandemic and the widespread negative impacts that it has created, we're grateful to be in the position that we are in today and look forward to what lays ahead. That concludes our formal remarks.

We'll be happy to take any questions now. Operator?

Speaker 0

Thank you. We will now be conducting a question and answer Our first question comes from the line of Tyson Bauer with KC Capital. Please proceed with your question.

Speaker 4

Good morning, gentlemen.

Speaker 3

Good morning, Just

Speaker 4

breaking down some of your cash flow management over the next two to three quarters, anything unique as far as special government receipts, whether they're from U. S, Malaysia or others? And of that $4,700,000 of cash you've built up, do you anticipate further asset sales? You got $12,000,000 on the books right now for lease pool. It sounds like we're finally moving completely away.

Is that $12,000,000 in essence up for sale?

Speaker 3

I wouldn't say that, Tyson. I'd say, again, we're looking to see the best way to get value out of that. In some ways, leasing transactions are the best way to do that. So we're looking at that on a case by case basis. But there are opportunities for lease fuel sales, and so I would anticipate further sales of equipment from time to time, but I'd also anticipate other leasing transactions.

As far as the governmental programs, there are some. There's some in Singapore for reimbursement of payroll costs. There's similar programs in Canada and in The UK. In The U. S, there's the Paycheck Protection Program, which we received a $1,600,000 loan from after

Speaker 4

the

Speaker 3

end of the quarter. So it was something in the second quarter. So there are some of those opportunities out there which help and offset some of the ongoing costs to maintain the workforce during this period of time.

Speaker 4

And of that 4,700,000.0 that you built up in cash, where do you see that over the next couple of quarters maintaining or what levels do you want to keep that at?

Speaker 3

I think we'd like to maintain those levels. Obviously, goes up and down as working capital comes in and out and demands come up, but I don't see dramatic change from that.

Speaker 4

Okay. In regards to with COVID coming into play, we were involved in testing with US Navy and other global navies, previously starting in December. Those schedules getting a monkey wrench thrown into them. Any updates on testing orders, working with your primes, that you could provide on that side of it?

Speaker 3

I mean, really nothing we can address. Again, as you noted, the COVID situation did disrupt some of those schedules just because of travel restrictions from our customers and and their customers. Some some of them are still still restricted on travel. Yeah. But we expect that to resolve itself and go forward, but nothing we can talk about specifically at this point.

Speaker 4

Okay. The delayed on the CMAP system delivery, now that we're in the June, has that been delivered in this quarter?

Speaker 3

It has not yet been delivered, it's in process.

Speaker 4

Okay. So you expect that to be delivered before the end of the month?

Speaker 3

Yes, we do. Before the end of the Okay. Fourth

Speaker 4

Klein, which seems to be the focus as you go forward in your business strategy, changing the name, a lot of the activities you've done in hiring personnel. We have not seen the revenue progress on that. And in fact, the best year Klein did was the year before you bought it. You've announced various technology improvements, new technologies like the MAX. Give us a sense of what sales have you actually received since those introductions of that new technology?

Speaker 3

Well, we have delivered product. We have sold that technology in a couple of different forms. We've not seen the dramatic improvement that we think we will see. As you know, these sales cycles can be quite long sometimes dealing with governmental programs especially. There's a long sales cycle, a long evaluation cycle, but we are very confident based on the feedback we're getting from the marketplace and from specific customers, we're going see that improvement as time goes on.

Speaker 4

Okay. And the timing for the name change in that, it's been discussed off and on for the last year or two years. Why now has the board taken the opportunity to make these changes and to push all the cards in or all the chips into the middle of the table that, okay, we now are a marine tech company and we're all in?

Speaker 3

Well, think just things started to come together. We've made a lot of additions from a personnel standpoint over the last year, made some really important additions, which are really having an impact. We're seeing some of these opportunities become more real as we feel more confident about it. We have some further plans for expansion of the technology and for taking some of our existing technology into other areas, other applications. So it's just it's a combination of things, Tyson.

As far as the specific timing, you know, coincides with our annual meeting this summer. So it's a shareholder vote. So we wanted to come just do it with the normal shareholder vote. So that's the reason we do it right now rather than a month ago or a month from now.

Speaker 4

Okay. I'll go back in the queue.

Speaker 3

Thank you.

Speaker 0

Thank you. Our next question comes from the line of Tyson Bauer with KC Capital. Please proceed with your question.

Speaker 3

Well, that was quick. We can't wait to talk to you again.

Speaker 4

There you go. I think you referenced that of this delivery that we are expected to see in Q2 in the C MAP system, has a lot of those expenses already been incurred so we may see a unique margin situation develop in Q2 on that segment?

Speaker 3

Well, wouldn't say that. Obviously, as we build stuff, it goes to inventory. So from a margin standpoint, not necessarily, but certainly from a cash flow standpoint, that has an impact. It's sitting in inventory, so you're not spending the cash, but you don't recognize that cost until you actually ship it.

Speaker 4

But it should bill

Speaker 3

But having said that, Tyson, just as you see volume increase, sales levels increase, you'll see margins increase because you're absorbing more of the overhead.

Speaker 4

Right. Are you getting paid upon delivery on that so we're not going to necessarily see accounts receivable build that will draw down cash? Or what's the expectations in cash flow from operations here in the second quarter because leasing typically is very weak in the second quarter?

Speaker 3

Yes, that's true. Again, I don't want to comment specifically, but receivables from those transactions are kind of normal terms. So we expect very quick terms. They're very reliable customers. So we don't see any issues there.

Speaker 4

And given you did not take any additional doubtful accounts that we took care of hopefully in Q4, any activity there on some of those possibly coming back into fold or those just we're done with those?

Speaker 3

No, there's some that we're still pursuing. Again, we made the provision based on our judgment as to likelihood and the risk involved given the current environment. But we certainly are continuing to pursue some of those and are very hopeful that we'll see some recovery there.

Speaker 4

Of that $10,000,000 in backlog, given that two of it as we already know will be delivered and some of this is related to parts services, other things that are involved. What percentage of that is expected to be delivered in the quarter or within the next four months?

Speaker 3

I guess I'm not prepared to talk about that specifically. I think we expect all of it to be within the year. I guess what I would say is we would expect the sales in the marine technology products in the second quarter to be up from the first quarter, partially because of that backlog. We feel pretty confident about that. But as you noted earlier, think we can expect the leasing business to be down from the first quarter.

Speaker 4

Would you anticipate lease pool sales to be up, down or approximately the same?

Speaker 3

Hard to say. As you know, those are transaction specific and they happen or don't happen. So they could be up, could be down. I really can't predict at this point.

Speaker 4

Should we use the marine tech revenue base as kind of what you normally incur without having to have system sales so that's a fairly almost an annuity type revenue stream for you?

Speaker 3

This is a tough environment to make specific projections about Tyson because people are delaying decisions but also have needs. So it's really hard to predict that. So I'd really like to stay away from any specific forecast on that.

Speaker 4

Okay. You would anticipate an increase in backlog as we go through the year, especially on the Marine tech side though?

Speaker 3

We would, yes.

Speaker 4

Okay. Thank you,

Speaker 3

Thanks guys.

Speaker 0

Thank you. Our next question comes from the line of Ross Taylor with ARS Investment Partners. Please proceed with your question.

Speaker 5

Thank you. Could you gentlemen give us an idea of what you project or obviously at the board level, you have some projections for what revenue expectations are for the next couple of years to get out beyond the COVID crisis situation. Can you give us an idea of what those numbers are for both the defense side of the business and the undersea mapping side of the business?

Speaker 3

Yes, Ross, we really don't want to get into specific projections at this point or any guidance on that. Although I will say we expect significant increases in that part of the business. That's where we're putting our focus. So we do expect significant growth there. But I really want to stay away from any specific metrics.

Speaker 5

Will you comment on are any other navies beyond the United States Navy looking at using your side scan sonar system as part of an unmanned under sea vehicle?

Speaker 3

Absolutely. Absolutely.

Speaker 5

And what kind of time horizons do you think we're looking at? Are those and are those nations European nations, Middle Eastern nations? Where might we find them on the map?

Speaker 3

I'd say all over the map, all over the world is a good place to look except obviously places that you would expect us to be on.

Speaker 5

Okay. Well, I'd say that you guys have a great technology. You've really struggled to bring the benefits of it to shareholders. I understand and support the desire to change the name. I'm not particularly wild about the idea of increasing the share count because when I think the shares are trading at a meaningful discount to what they're worth.

I've just learned through my experience that I'm better off not trusting boards to have the same view of an equity value that I do. And so I would say I'm a little concerned about that. And I think you guys really need to find a way that if you can't get this stuff generating bottom line return for shareholders and therefore getting the stock price meaningfully higher I think you should explore the sale of the business. I understand that when you get a major contract from someone like the U. S.

Navy that will become a lot easier. But I do think that the asset's undervalued. And I think your shareholders have been exceptionally patient in waiting for the turnaround which seems a little bit like hanging with Rosencrantz and Guildenstern on the beach.

Speaker 3

Okay. Thanks, Ross. Thank

Speaker 0

you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to management for any final comments.

Speaker 3

Okay. I'd like to thank everyone for joining us today. We look forward to talking with you again at the end of our next quarter. Thank you.

Speaker 0

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