MIND Technology - Earnings Call - Q2 2021

Transcript

Speaker 0

Greetings, and welcome to the MIND Technology Fiscal twenty twenty one 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Ken Dennard. Thank you, Mr. Dennard. You may begin.

Speaker 1

Thank you, operator. Good morning, and welcome to the MIND Technology fiscal twenty twenty one second quarter conference call. We appreciate all of you joining us today. Your hosts are Rob Capps, Co Chief Executive Officer and Chief Financial Officer and Guy Malden, Co Chief Executive Officer and Executive Vice President of Marine Systems. Before I turn 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 minetechnology.com, or you can listen via recorded instant replay until September 22, and information on how to access the replay features were provided in yesterday's earnings release. Information reported on this call speaks only as of today, Tuesday, 09/15/2020, and therefore, you're 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 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 performance or results 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. Please note that the contents of this call are covered by these statements. Now I'd like to turn the call over to Guy Malden. 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. While the COVID-nineteen pandemic still looms large over industry activity and our own business, the implementation of our rebranding strategy and our move away from the traditional land seismic leasing business is enabling us to more fully realize our strategic vision and strengthen the company's prospects in the global industry. I'll come back and address this important milestone in a moment. But first, let me start by making some general comments about the second quarter.

As Rob will more fully explain, with our decision to exit the land leasing business, those leasing operations are now reflected as discontinued operations in our financial statements. The results from continuing operations reflect those of our ongoing business, Marine Technology Products. As we anticipated, there was a reduced level of activity as well as widespread general market uncertainty due to the COVID-nineteen pandemic. However, our Marine Technology Products segment posted higher sequential revenues despite lingering COVID related restrictions. Sequentially, our second quarter results were up from Q1 with consolidated revenues from businesses rising by roughly 60%.

On a year over year basis, revenues from these continuing operations were down by about 25%. All things considered, we are pleased with the performance of our Marine marine technology business in these adverse conditions. However, there are still restrictions in place, which have constrained our operations and frustrated our efforts to reach some of our pre pandemic goals. As we touched on last quarter, all of our facilities are operational, though with certain restrictions and new procedures due to COVID. Regulations can vary significantly from location to location and tend to change rapidly, which presents a challenge to daily operations.

The resulting uncertainty and travel restrictions, particularly internationally, we believe have had a significant impact on the ability and willingness of customers to make firm commitments. On the other hand, COVID concerns don't appear to have greatly impacted inquiry and bid activity in the marine industry as both have actually remained quite robust with a high degree of customer interest and engagement despite all the uncertainty. However, this strong interest has not been accompanied by a similar level of orders as COVID restrictions are causing travel related limitations when attempting to conduct some product testing and demonstrations. As a result, and as I just said, customers seem reluctant to make commitments. With that said, let me now return to the subject of our strategic rebranding and our move away from the seismic leasing business.

As you know, after receiving shareholder approval, we completed our reincorporation and rebranding last month, formalizing changes to both our domicile and name. This change represents a major step in establishing a fresh and revitalized new identity for the company that more fully underscores our tremendous technological capabilities in the marine industry. It also represents a departure from our traditional seismic leasing business, which we have decided to exit entirely. We believe it also provides additional financing flexibility to enable us to navigate these uncertain times and pursue our growth objectives. Now overall, the completion of this process marks an important time in the development and evolution of MIND technology, and we have capitalized on this by rolling out a new corporate website that fully reflects our new identity.

It goes without saying that we are excited and enthusiastic about the prospects of the company as we work to expand the presence of our marine products and services worldwide. Let me

Speaker 3

now turn the call over

Speaker 2

to Rob, who will discuss our financial results in more detail. I will come back to add some closing comments before turning the call over for Q and A.

Speaker 3

Okay. Thanks, Guy. I'll start by giving a more detailed review of the financial results. But before I proceed, I'd like to highlight an important item that Guy touched on briefly. Given the decision by management and the Board to exit the land seismic leasing business, the equipment leasing segment is now reflected as discontinued operations in our financial statements.

Therefore, the segment's results will be reported separately, net of tax, after continuing operations. In addition, the segment's assets and liabilities are now classified as held for sale and grouped separately on the balance sheet. You'll note that all prior periods have been restated to reflect these reclassifications. Now let me first review the financial results of our continuing operations, which consist of our Marine Technology Products business. For the second quarter, revenues from continuing operations totaled 5,100,000.0 down about 25% from $6,800,000 in the second quarter a year ago, but up almost 60% from $3,200,000 in the 2021.

CMF revenues were down year over year to $4,100,000 in the quarter from $5,000,000 in the year ago quarter, but were up 84% sequentially. Second quarter revenues from client were $1,000,000 a decrease from $1,800,000 a year ago, down about 19% sequentially. And in the quarter, we did deliver a SeaLink streamer system for installation on a vessel built for the Japanese coast guard. However, as stated earlier, we believe the disruptions and uncertainty introduced by the COVID pandemic and other events have caused many customers to delay spending decisions and introduced logistical challenges that have impacted our results. Let me give you an example of that.

In the second quarter, we completed a C Link related due to travel and shipping restrictions, the customer was unable to arrange shipment and take delivery of the system. Accordingly, we were unable to recognize that sale in the quarter, but we do expect to do so in the third quarter. Second quarter gross profit from continuing operations was $2,000,000 which was down from 2,800,000 a year ago, but up from $05,000,000 in Q1 of this year. This represents a gross profit margin of 40%, which compares favorably to the 41% we achieved in last year's second quarter and well above the 15% achieved in the prior quarter this year. The increase in margins was a result of improved absorption of manufacturing overhead due to higher revenues.

Our ongoing cost containment efforts continue to yield savings to our cost structure as our general and administrative expenses related to our continuing operations were $3,000,000 for the 2021, which is 12% lower year over year and essentially flat sequentially. Our research and development expense was $755,000 which was up 52% from a year ago and up 84% from the first quarter of this year. This is reflective of our ongoing technology and product development activities. Our overall operating loss for the second quarter of this year was $2,400,000 as compared to an operating loss of $1,700,000 posted in the year ago quarter and a $6,100,000 loss in the quarter Q1 of this year. Our second quarter adjusted EBITDA from continuing operations was a loss of $1,500,000 compared to a loss of about $700,000 in last year's second quarter and a loss of $2,500,000 in Q1 of this year.

The mine's capital structure is debt free and liquidity remains solid. At the end of the quarter, we had over $22,000,000 of working capital that included cash and cash equivalents of about 2,600,000 As we've touched on before, our capital and cost structures are well suited to handle the continuing uncertainty of this environment. With no debt, we are free of the strictures, financial obligations, restrictive covenants, which gives us significantly more flexibility and enhances the viability of the business should challenging conditions persist for an extended period of time. With our near term plans to monetize business as well as flexible cost structure, we are well positioned to navigate this environment and position ourselves for the eventual recovery. Though the shroud of market uncertainty remains, we do see a solid baseline of inquiries and request for quotes.

As Guy said, customer interest has been robust, but this hasn't yet manifested in order activity due to both a more customary environment and the many restrictions and regulations markets that we serve. As a result, our firm order backlog at seven point six million dollars at the end of the second quarter was down from the first quarter backlog of $10,200,000 Now with that, let me turn things back over to Guy for a few closing comments before we take questions.

Speaker 2

Thanks, Rob. Based on our own visibility, the continuation of challenging economic fundamentals and restrictive travel and activity regulations, we currently believe that the third quarter revenue levels for our Marine Technology Product business will be comparable to the second. We do remain confident in the long term prospects for the business, but timing of orders and near term activity remain uncertain. We will continue adapting to market conditions and focusing on operational execution and the advancement of our technology. As an example, I'd like to highlight our latest effort to serve our customers and develop better and more cost efficient solutions to address market needs.

That being the recently announced agreement with a major European defense contractor to jointly bring to market the next generation of synthetic aperture sonar systems, or SAS, for both commercial and military markets. Now this contractor has a recognized expertise in marine acoustic technology, and the alliance will employ technologies previously developed by both parties. We believe that by combining the strength of our respective products, this will yield new and innovative solutions that better address the needs of the marine market for higher resolution imaging. SAS is an emerging technology that can help achieve these aims and vastly improve on the quality of an image produced by traditional side scan sonar. By leveraging our respective strengths, we believe we can bring products to market more quickly and increase the addressable market for our Klein sonar products as well.

Our efforts to further the reach of our marine products don't end there either. Despite lingering COVID restrictions and activity reductions, we have nonetheless been able to demonstrate the effectiveness of our technology for customers. For instance, there has been a good deal of activity with demonstrations of our MAX and MicroMax sonar technology to various groups in the US Navy. Furthermore, we are also seeing more developments in the marine exploration market as many customers are requiring enhanced technical capabilities, such as dual hydrophone capable source controllers. We believe our GunLink products are unique in their ability to provide this and other important capabilities.

Now these are all favorable signs for our future order flow, and they also demonstrate how new product developments are opening doors to expanded opportunities for us. We plan to aggressively pursue the furtherance of our technology and products, whether through internal development, acquisition or alliances. We also plan to expand the markets for our existing line of products and to focus on providing more value addition and higher return on investment. In conclusion, we see challenges in the market, but we see opportunities as well. With our strong financial position of no debt, liquidity and access to additional capital, we have the solid foundation needed to overcome the challenges and capitalize on the opportunities.

With that, we will now open up

Speaker 0

you. Our first questions come from the line of Tyson Bauer with KC Capital. Please proceed with your questions.

Speaker 3

Good morning, gentlemen.

Speaker 2

Hey, Tyson. The

Speaker 4

discontinued ops, was that something that was always in the original plans to label that as a business that would then be viewed as a single entity, thus why we went with the discontinued ops as opposed to just an asset sale and, dwindling down that business activity on the land lease side where then we once we got the assets sold, which I see is $6,600,000, that that would just work its way off the income statement and the balance sheet.

Speaker 3

Tyson, it's really an accounting rules issue and that we were had announced that we are exiting that business. And since that is a segment that we've disclosed, the accounting rules really dictated that we treat that as discontinued ops. Okay. So really but we don't be able to get a choice. Even

Speaker 4

though you thing on marine, just because you treat it as land separately, that's why it got segmented out?

Speaker 3

That's exactly right. Yep. There's some specific rules as to, you know, what constitutes a discontinued operation. And, actually in a segment of your business, you know, as defined in in the accounting rules is one of those criteria.

Speaker 4

Okay. And it would appear that cumulative, currency effects and depreciate everything just kinda gets thrown into this quarter and more or less just as cleanup situation?

Speaker 3

That's one way to look at it. Think it's the CTA, the

Speaker 4

cumulative translation loss, you know, estimated disposal cost, you know, things of that nature. So that's exactly right. Okay. And when do you anticipate realizing that $6,600,000, of assets turning into cash?

Speaker 3

Well, you know, the $6.6 it's kind of a carrying value. That doesn't necessarily reflect what we expect to realize upon it. But, you know, as we said when we made the announcement, you know, we expect to do it within twelve months. It could be shorter than that. That's, you know, something we're working on now.

Speaker 4

Okay. The 1,600,000.0 PPP loan that you received, do you expect that to be forgiven or will you hold that and incur the 1% interest rate?

Speaker 3

We think that we will be able to have a great part of that forgiven. The, you know, process for making the application is a bit cumbersome, and we're in the process on that. We actually can't, you know, treat it as forgiven until it actually is forgiven, but we do think a significant part will be forgiven.

Speaker 4

Okay. Given we have a lot of things thrown into this quarter and you're and gave us a little bit of an outlook for next quarter, what are you looking at as kind of a cash burn rate over the next couple quarters?

Speaker 3

I think with all things considered, we think we can kinda hold our own. I don't wanna be specific, as to projection, I think we can feel we can hold our own somewhat, with, you know, the activity with the leasing business as well as the other operations.

Speaker 4

Okay. You announced some completed tests for the US Navy. As that gets pushed, hopefully, on the timeline and the, DOD has been issuing, contracts or helping keeping their suppliers going, a, do you qualify for that program since you're kind of a small player in this? And two, what kind of timeline are you now looking at as far as procurement now that the testing is complete?

Speaker 3

Know, Tyson, that's a difficult thing to answer. You know, there are a variety of of entities that we're dealing with there, a variety of programs. So it's really difficult to project. So I'm I'm really reluctant to make any any any any forecast there.

Speaker 2

The good news is is that it's multiple entities, Tyson. We started out with one, and now it's it's it's growing into multiple. So we're we're trying to hit it from as many angles as we possibly

Speaker 4

possible to win something that allows you to continue in prototypes and that just to keep funds coming into your company?

Speaker 3

Yes. Yep. Sure. Absolutely.

Speaker 4

In the original announcement with the European partner, it was alluded to sometime during the fall, which was a May time period. But we should see further announcements on possible products, introductions, those things. Is that timeline still in place? And if so, can you give us any further color on what we should expect to see out of that partnership?

Speaker 3

Well, think beyond what Guy said, I'm not sure why I'm saying much more. I think the time frame is holding up. We're we're pretty much on schedule with that. Yeah. So I think in the coming weeks and months, you'll see more and more come out on that.

Speaker 4

And what should we expect to see it from that side, the European side, those announcements, or from yourselves?

Speaker 3

I'll take them ourselves from this side. Okay.

Speaker 4

Last one, you talked about bid opportunities growing. That hasn't gone away. For your shareholders, just give us a sense on what is that pool of possibilities at a pipeline size. I mean, are we talking five to 10,000,000, 10 to 20,000,000, larger depending on the programs, if they're multiyear accordion features. Give us a sense of what we're talking about that led to changing the name, changing to Delaware, discontinuing, you know, give us a sense of why shareholders should remain patient.

Speaker 3

So, again, without trying to be too specific and, you know, give a specific time frame, we're looking at, you know, tens of millions of opportunities, we feel. We think there's significant upside from where we are. So these are potentially large programs, you know, not only within the, you know, domestic arena, but internationally as well. There are multiple product offerings that we're talking about here. And, you know, even on the the more traditional seismic side, you know, there is a definite uptick in activity there in inquiries and and activity from equipment.

Speaker 2

Those are system sales. Yeah.

Speaker 3

So we we think there's there's a big upside, and that's the reason it's time to do it.

Speaker 4

So even with that 1,800,000.0 sale that should be recognized in q three, you're still anticipating three to be similar to q two even with that additional system sale in there. Is that correct?

Speaker 3

Yes. In that ballpark. Again, you have to understand the uncertainty in the marketplace right now, you know, has not gone away, but that's that's how we how we see it today. Okay. Thanks, gentlemen.

Yep. Thanks, Tyson.

Speaker 0

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

Speaker 5

Okay. Well, most of the questions I have were already answered to the problem with following Tyson. Can you describe how the revenue split is gonna go with this new partnership, with the European partnership? Is it gonna depend on what specifically is sold? Do you get more if certain products that come from your technology are sold?

Or are you guys going to split it in some preset percentage?

Speaker 3

Without again being too specific on that just yet, it's more of a specific arrangement, specific split, if you will, or specific economics as to, you know, what they see and what we see. So who sells it doesn't have that much of an effect.

Speaker 5

Okay. That's good. And the setup therefore, is it also going to involve a development process where you and they are going to work together to develop additional uses for your technologies?

Speaker 3

Yes. Yes, absolutely. Yeah.

Speaker 5

And as part of the purpose of this, from the European side, to give them better access into The US market?

Speaker 3

I think that is one aspect of it, yes. As well as, you know, entrance into the commercial market, you know, not military market worldwide.

Speaker 5

Okay, good. So basically what it is, it looks like there are you do bring a lot to the although you're a much smaller player, you're going to bring a lot to the table for this and you're an important part of this process for them.

Speaker 3

Yeah, that's what we think for sure. They have choices. Yeah.

Speaker 5

Okay. And Yeah. And how does this impact any current initiatives you might have with the US government?

Speaker 3

Well, I think this is a positive in that it shows a clear roadmap to SaaS capability for our existing products and future products. So I think it opens lots of doors for us potentially.

Speaker 2

That's the important thing is that we were missing the the SaaS in our portfolio, and this gives us this fills out the portfolio with the SAS offering.

Speaker 5

Okay. But an example, on some of these other projects you've been working on and we've been waiting for, they are outside the purview of this JV?

Speaker 3

Yes, yes. Yes.

Speaker 5

Okay. And when you talk about multiple entities, just in answer to Tyson's question, is that mean you're working with agencies away from the U. S. Navy for other uses, other governmental uses such as homeland security or things of that nature? Or is that different parts of the U.

S. Navy?

Speaker 3

Different parts of the U. S. Navy is what we were referring to.

Speaker 5

Okay. And does that set up the possibility for multiple purchase orders from different parts of the Navy?

Speaker 3

Oh, sure.

Speaker 5

Okay. Great. So basically what you're seeing is you're seeing an expanded interest across the Navy in your technology.

Speaker 3

I think that's Okay. Fair to

Speaker 5

And is some of this, do you believe, tied into the fact that with the increasing use of autonomous underwater vehicles, you know, the Navy is going to need to do a much more extensive mapping effort? I think a lot of people in this country forget that exists so that air launched and sea launched cruise missiles could hit their targets, not so you could find the department store or the grocery store. And it would seem that that need is probably even greater for autonomous underwater vehicles because you can't use traditional sensing because of the way water transmits energy. And so they're going to have to map, you know, any hot spot pretty significantly and also pretty regularly just to make sure that if they need to deploy, underwater vehicles and then underwater vehicles, they can do so safely. Is that part of what you see as the need growing here and it's why this is going to be such a great long term opportunity?

Speaker 2

It's definitely related to the fact that there's big focus on vehicles, both surface and underwater. The technology, again, we're talking about MAX and MicroMAX to begin with, that we've been working on and we have developed fits very, very well in that arena with that technology. So I think the answer is yeah. It is driven by vehicles, both surface and underwater.

Speaker 5

It's exciting, although I do feel like I've walked into a airing of waiting for Godot, but my hope is that Godot does show up pretty damn quickly.

Speaker 3

Ross, we understand. And, you we feel that way sometimes too. Certainly, the environment that we're in hasn't helped things at all. I forgot about that, but I understand.

Speaker 5

But you do feel that with this environment, you feel that the importance of what you're providing should I mean, would think the Navy these are issues the Navy doesn't have a huge workaround time on. I mean, if they fail to do these types of programs, they're not able to move ahead with other programs that are pretty important to them it would seem. One would hope the Navy starts to find ways to get things done. Thank you gentlemen.

Speaker 2

Yeah, one comment, Ross. One fact, the ocean has only have been explored, 6% of the ocean has been explored, has been mapped. So there's a lot of there's a tremendous amount of unmapped areas out there. So not just the US Navy, but you can sort of translate that around the world. And and there's there's going to be a lot of activity, ocean related activity.

Speaker 5

Well it definitely does appear, mean as you said, point out that all these initiatives are your ability to do undersea mapping at a much higher efficiency rate than any competitive technology for example would strike me as giving you a huge competitive advantage because it should reduce the cost and increase the speed and increase the capabilities. Right now there doesn't appear to be anything out there.

Speaker 2

It's efficiency as well as image quality gene improvement.

Speaker 5

Yeah. Well, as I said, it sounds very exciting. We just need to get there. I know we thought we were going to be there six, nine months ago, but hopefully we'll get there in the next three.

Speaker 3

Okay. Thanks. Thanks, Ross. Appreciate it.

Speaker 0

Our next question has come from the line of Tyson Bauer with KC Capital. Please proceed with your question.

Speaker 4

I promise to make this quick. SG and A, you didn't have a whole lot of change there without the discontinued. Are there some unique things that were included in that? And what should we expect your ongoing SG and A and operating expenses to go to to help out your leverage there?

Speaker 3

Really nothing much unusual there. If you look at as we recast it with just the continuing operations, it's been fairly constant this year, you know, roughly constant. So I wouldn't see a dramatic change in the near in the near term at least.

Speaker 4

Because it looks like, given your current margins, you really are looking at you need to do, what, approximately 10,000,000 a a quarter just to break even or to get up on that side of it. Is that correct? Is that what you're focusing on, trying to hit 10,000,000 a quarter?

Speaker 3

Yep. That's the ballpark. That's right. Okay. And Just gotta do the math.

Speaker 4

On the ask or it's it's SaaS. SaaS offering. Sorry about that. The better usually, you guys and your technology that you've been doing with Klein, you're trying to offer a off shelf technology that can be integrated with existing, vehicles that are out there and other companies. Will this new offering be of that same, mindset where you're trying to make a more affordable option than what's available in the market now today with that better technology, you know, which way are you going?

The the better technology route that you think you'll get paid for or creating something that's far more affordable and more off the shelf that's easily to be used by other, you know, vehicle manufacturers?

Speaker 3

It's it's a bit of both both, Tyson. So what we're trying to do is offer a much more affordable, solution than the, you know, multi bazillion dollar that you see from the big guys, yet much higher quality, a of a product from resolution standpoint. So a little bit of both. Kinda trying to meet in the middle of the find a happy medium there. Okay.

And the

Speaker 4

really from the European partner's standpoint. Can you give us a little detail on how much how many years they've spent on trying to develop this and the money they've spent putting into this?

Speaker 3

Many and many years and many millions. Okay.

Speaker 4

And then you will be the manufacturer. Correct?

Speaker 3

That's correct. Okay.

Speaker 2

All right. Thank you.

Speaker 3

Okay. Thanks.

Speaker 0

We have reached the end of the question and answer session. I will now turn the call back over to management for any closing remarks.

Speaker 3

Okay. Thank you very much. We appreciate everyone joining us today. And we look forward to seeing you after our third quarter. Thank you.

Speaker 0

This does conclude today's conference. Thank you for your participation. Have a great day.