MIND Technology - Earnings Call - Q3 2021
December 4, 2020
Transcript
Speaker 0
Greetings, and welcome to MIND Technologies Third Quarter twenty twenty one 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 Mr.
Ken Dennard. Thank you. You may begin.
Speaker 1
Thank you, operator, and good morning, everyone, and welcome to the MIND Technology Fiscal twenty twenty one Third Quarter Conference Call. We appreciate all of you joining us today. Your hosts are Rob Capps, TOE Chief Executive Officer and Chief Financial Officer and Guy Mauldin, TOE Chief Executive Officer and Executive Vice President of Marine Systems. Before I turn the call over to management, I have the normal housekeeping details to run through. If you'd like to listen to a replay of today's call, it will be available for ninety days via webcast by going to the Investor Relations section of the company's website at minetechnology.com or a recorded instant replay will be available until December 11.
Information on how to access the replay features was provided in yesterday's earnings release. Information reported on this call speaks only as of today, Friday, 12/04/2020, 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 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 incorporated in our press release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements. With that behind me now, I'd like to turn the call over to Guy Mauldin. 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 third quarter conference call. Conditions in the global marine industry remain challenging due to the lingering impacts of COVID-nineteen and the growing number of restrictions and regulations that have emerged as a result. However, we continue to make progress and build momentum in both our day to day operations as well as our longer term strategic growth initiatives. With that in mind, let me begin by making some general comments about the third quarter.
I'll then take the opportunity to outline what we consider to be important market trends emerging in the marine industry, how they fit into our future growth plans and what we are doing to capitalize on them. Turning now to the third quarter. While COVID-nineteen negatively impacted our operations due to lingering uncertainty and travel restrictions, the quarter progressed a bit better than we had anticipated. As we mentioned during our second quarter call, our expectation had been that third quarter revenues would be roughly flat quarter. However, we managed to achieve nearly a 29% sequential improvement in revenues despite the restrictive macroeconomic environment.
As I stated in our previous call, we believe the pandemic and its consequences have weighed heavily on our customers and hampered their willingness to commit to expenditures. Despite that, there still is a healthy level of inquiry and bid activity in the marketplace. We feel that now is an ideal time to highlight and review our approach to the global marine market since we've recently completed our comprehensive reincorporation and rebranding, and are also in the midst of exiting our legacy seismic land leasing business. With these actions either completed or in progress, it's helpful to review our vision and outline our longer term initiatives for the company and how we plan to build on the momentum we've established to pursue our identified growth opportunities. So let me start by outlining our target markets before I review the trends that we see developing in those markets and how we plan on leveraging our capabilities to take advantage of the opportunities these trends provide.
Now looking at the marine industry, based on our target markets, we provide our technology to three major segments. First, the exploration market, which includes marine seismic exploration and survey activities conducted to support decision making on engineering and renewable energy projects, as well as oil and gas and other mineral exploration. We estimate its serviceable market size, which is the portion of the market that we can serve with our current and planned products, to be roughly $440,000,000 per year. Second, the survey market, which is made up of search and recovery activities as well as hydrographic and construction surveys is estimated to have an annual serviceable market size of about 150,000,000 And third, the defense market, which is made up of applications such as mine countermeasures and anti submarine warfare and maritime security is estimated to have a serviceable market size of about $750,000,000 per year. So all told, these three market segments yield a combined estimated serviceable market size of about $1,300,000,000 a year.
Given the size of the opportunities available to us, our goal over the next five years is to grow our annual revenue to $140,000,000 with EBITDA margins in excess of 20. We anticipate that most of the growth will be driven organically with the help of our strategic initiatives, which I will address shortly. The remaining balance will be driven by strategic partnerships and acquisitions. Now within those three market segments, there are certain developing market trends that represent significant growth opportunities for MIND. As we now see it, those trends include the following: First, the proliferation of unmanned or uncrewed marine vehicles, be they surface or underwater vehicles for the commercial and military markets.
These are often referred to as unmanned surface vehicles or USVs and autonomous underwater vehicles or AUVs. Second, growing customer demand for higher resolution sonar images. And third, the need for alternative technology solutions for anti submarine warfare and maritime security to counter the growing maritime security concerns, such as the rapid acquisition of conventional submarines in regions such as Southeast Asia. In order to address these trends and better exploit the opportunities, we have established certain strategic initiatives. For instance, to address the growing market need for uncrewed and or unmanned vehicles, we have focused on providing sensor packages tailored specifically to these vehicles, enabling customers to obtain a more complete solution and easier integration into their platforms.
Similarly, to address the growing customer need for greater resolution sonar imaging, we've recently partnered with a major European defense contractor in a mutually beneficial arrangement to produce synthetic aperture sonar, a type of side scan sonar that can yield much higher resolution images. And finally, in the area of maritime security, we are applying existing, commercially developed technology, such as our solid streamer product to provide more cost effective, practical solutions to this developing market. Furthermore, our substantial existing production capacity enables us to eliminate a significant barrier to entry and produce these items quickly and economically versus more traditional solutions. Now initiatives like these play a critical part in the development of our company as we look to expand and add new technology and applications to the marine market. We feel that they are in very natural progression from our existing sonar and seismic capabilities.
It's my hope that this discussion has enhanced your understanding of how we plan to leverage our core competencies and utilize existing technologies in new, unique and innovative solutions to expand into new markets. Let me now turn the call over to Rob, who will discuss our financial results in more detail and add some closing comments before turning the call over for Q and A.
Speaker 3
Okay. Thanks, Guy. And I'll begin by giving a more detailed review of the third quarter financial results. But first, let me remind you that our legacy leasing operations are classified as discontinued operations and our continuing operations are composed entirely of our marine technology products. Revenues from our continuing operations totaled $6,500,000 in this quarter, up nearly 29% sequentially from $5,100,000 in the 2021.
You may recall that during the second quarter, we completed a $1,800,000 ceiling related order, but the customer is unable to take delivery at that time due to COVID related transportation issues. Now as we anticipated, this order was successfully completed during the third quarter. Third quarter gross profit from continuing operations was $2,300,000 up from $2,000,000 in Q2. This represents a margin of 35%, which was down from the 40% achieved in the prior quarter. The decrease in margins result of higher product testing and sustaining engineering activities during this period.
Our general and administrative expenses were $3,000,000 for the 2021, which is essentially flat sequentially. Our research and development expense was $912,000 up 21% from the second quarter of this year. This increase was mostly due to activity related to our passive sonar array strategic initiative and included cost associated with the deployment of the test system. Our overall operating loss from continuing operations for the third quarter of this year was $2,300,000 as compared to an operating loss of $2,400,000 in the sequential quarter of this year. Our third quarter adjusted EBITDA from continuing operations was a loss of $1,500,000 which was about flat with Q2 of this year.
And we are making progress on the sale of our land leasing business despite the impact of COVID on that business. We sold assets totaling over $700,000 during the quarter. This process will continue to the balance of this year and likely into the 2022. Mine's capital structure and liquidity remains solid. At the end of the quarter, we had over $21,000,000 of working capital that included cash and cash equivalents of over $2,600,000 With no funded debt other than two governmental assistance loans, a lean flexible cost structure and pending sale of our land leasing business, we are well positioned for the current environment and for an eventual recovery.
Despite all the continuing COVID driven volatility in the market, we are still seeing healthy levels of customer interest. There has been an uptick in inquiries, requests for quotes and orders of late. And the most recent example of this will be the recent orders for gunning systems and upgrades to be delivered in Q4 and in the first quarter of next year. We believe that the increased interest that we've seen from numerous customers in our source controller technology is indicative of improving activity within the marine seismic exploration market. Our firm order backlog now stands at $8,200,000 at the end of this third quarter, up sequentially from $7,600,000 at the end of the second quarter.
Although the effects of COVID on market fundamentals can wreak havoc on the timing and pace of our orders, we have nonetheless seen improvement in the global marine markets. As we've emphasized before, heightened logistical hurdles and uncertainty around customer spending will continue to be a factor in short term visibility, but we currently expect fourth quarter results from our Roaring Technology Products business to show improvement from third quarter levels and that this trend will continue into fiscal twenty twenty two. Our more hopeful outlook does not mean that we can now return to our normal operating procedure. We will remain guarded and watchful in assessing market conditions and should conditions take a turn for the worst, we stand ready to make further adjustments to our operations structure. And our balance sheet affords us a good measure of flexibility towards raising additional capital should that need arise.
Our focus on operational execution and implementation of our strategic initiatives will remain foremost in our minds. We look to build on our strengths and add innovative new technologies to our portfolio, while also harnessing and adapting proven technologies into novel new solutions that can economically address the needs of the global marine marketplace. Adherent to these principles will take us a long way towards completion of our transformation and the ultimate realization of our long term strategic goals. That concludes our formal comments. And at this time, we'll be happy to open up the lines for your questions.
Operator?
Speaker 0
Thank you. We will now be conducting a question and answer session. Our first question is from Tyson Bauer with KC Capital. Please proceed.
Speaker 4
Good morning, gentlemen.
Speaker 2
Hey, Tyson. Good morning, Tyson.
Speaker 4
In the third quarter, the you made a comment that somewhat beat your expectations going into the quarter. You knew the source controller was going to hit or you had thought that was going to happen. What part of the Q3 results were you pleasantly surprised by that you achieved that you did not expect going into the quarter?
Speaker 3
It's mostly on the exploration market, the seismic exploration market, both since other source controller activity as well as repair activities, spare parts, things like that. And just kind of general uptick in activity we're seeing in area right now contributed to that.
Speaker 4
Okay. So it has more to
Speaker 3
do with
Speaker 4
the outlook and the activity on bidding possible orders in the future. That was the unexpected pleasant surprise for you?
Speaker 3
Yeah. That's right. I mean, was no one one single, you know, order that contributed to that. Was it was a number of smaller ones kinda added up. So, again, just general uptick in activity.
Speaker 4
And the new order that you announced a couple days ago, probably in the range of what we've seen in the past between that $1.5 $2,000,000 range that would be added into that backlog you had at the October?
Speaker 3
Yes. Those are upgrades. The last few things are upgrade systems. So those can vary, but they're typically north of $1,000,000
Speaker 2
Okay.
Speaker 3
Can be a bit more, can be a bit less, but that's just to give you a sense of magnitude.
Speaker 4
R and D was up due to testing. I'm guessing that was more so with the military on some of those tests that you're completing. Should we anticipate staying at that level or higher R and D spend as you try to get that new product launch with your partner in Europe and additional activities with that partnership?
Speaker 3
We have a bit of a spike in the third quarter as we put out this test system for passive array. It was deployed on the East Coast in the ocean. So that contributed to some of that. I think R and D activity in general, it will start to will be at the same general level we've seen recently, but there was a bit of a spike I think.
Speaker 4
Okay. So we'll return back kind of that $0.07 $5,000,000 range?
Speaker 3
Yes, roughly. Again, any given quarter you could see some activity pick that up, especially if we're putting out test systems, things like that.
Speaker 4
Okay. And the cash flow statement, have 1,600,000 from PPP. So has that then officially been forgiven? You do not have to pay that back? And what additional foreign reimbursement did you get on payroll expenses and other initiatives by those countries?
Speaker 3
Well, the PPP has been officially forgiven yet. We've made application It's going through the process. We anticipate most if not all of it to be forgiven. And there's a few 100,000 from foreign programs, Singapore, UK, things of that nature. I don't have the exact number in front of me, but it's a few 100,000.
If I go through Not so much in the quarter, that was really earlier in the year.
Speaker 4
Right. So if I go through those numbers, you had $2,700,000 in asset sales, one call it roughly about $2,000,000 in reimbursements by various government activities, PPP and the other ones you just mentioned, and a $1,300,000 inflow from common stock sale. That's about $6,000,000 bringing in the door to help out the balance sheet. That's hard to replicate. Well, obviously, you have your asset sales that you still have to complete next year.
But at some point, we're going to have to get the cash flow from operations to
Speaker 3
get this going. We really Okay,
Speaker 4
go ahead.
Speaker 3
I said absolutely. I mean, of course, you're talking about year to date numbers, of course, not quarterly numbers. Those are year to date numbers you're looking at. But you're right. I mean, COVID has definitely slowed down our timetable to put us where we are comfortably on a cash flow positive quarter after quarter.
But we see the path there most clearly. There is some uncertainty given the environment that we definitely see the path to it.
Speaker 4
And what was related to that common stock proceeds?
Speaker 3
We have an ATM we put in place. We tested the market a bit to see what the market looked like, how it responded. And that's wasn't much. That's what it was.
Speaker 4
Okay. And was that done to just institutional or in the general market? Or was that specific to insiders?
Speaker 3
No, it was in general in the market. Okay. And you talked
Speaker 4
about asset sales being completed by the first half of next year. Should we see any activity there in this next quarter, the quarter we're currently in that would give you some cushion?
Speaker 3
Well, I think we'll definitely see some activity this quarter. We'll step up.
Speaker 2
Okay.
Speaker 4
What was the thought I get this question a lot by some of your institutional holders and that is what was the behind thought putting out such large numbers in that five year target given the difficulty the company has been in achieving those financial results or progress? What was that trigger, that tipping point that said, we're now at that point, we're confident, we're comfortable, we can put out a $1,300,000,000 market addressable that we can go after or $140,000,000 in five years, percent margin.
Speaker 3
What
Speaker 4
occurred or what happened that said, all right, now is the time we can do that. We got an ace up our sleeve. It's going to be a stair step. It's going to be a
Speaker 3
gradual trajectory. Just give us
Speaker 4
a little sense on why all of a sudden we've gone to this route.
Speaker 3
Sure. So it's not so much as all of a sudden. I mean, we've been building towards this, Tyson. We've done the we did the rebranding. We made the decision to exit the land business.
And we saw some of these strategic initiatives that the guy referred to start to develop. And we just felt like the time was right to let's assess what the market looks like, let's share that with our shareholders as to what we think our potential looks like. Yes, we're not there yet. But we see that market there and we see a path to that level. These are big markets we're addressing.
They're new markets for us. They're new applications of our existing technology. So we just it's a combination of things. There's no one thing that said, uh-huh, it's there. But a number of things started to come together, again, through these strategic initiatives.
The partnership in Europe with our European partner, that was one of the things, not by itself, but one of the things. The applications we see with our streamer technology into passive arrays gave some confidence. The reception we're getting for our MAX technology, our gap filler technology, and how we think that's going to enhance the acceptance of our overall site scan sonar products and how we can apply that into unmanned vehicles. So again, all these things came together. We just thought it was the right time to share that.
Speaker 4
And is it more of a stair step effect in, say, year one, pending ex contract, we could materially improve ourselves and our position and work off that base for step two? Or is this more of a hockey stick where in year three or whatever or four, all of a sudden we'll see an exponential type growth scenario?
Speaker 3
Yes, I mean, that's tough to predict, Taz. I think we see that it is building gradually. But given the nature of some of these markets we're pursuing, you can tend to get a bit of a stair step from time to time. But those are difficult to predict. So we're looking at more of a gradual increase, but there certainly is the opportunity for the big step.
Okay. Thank you, Yes, you bet. Our
Speaker 0
next question is from Ross Taylor with ARS. Please proceed.
Speaker 5
Thank you. It's always exhausting following Tyson. Can you give us a little bit more color on where you specifically see your technologies bringing advantages to the market versus current technologies? And an example in towed array, how old is the current technology and why do you see what you're doing being a significant improvement in that area?
Speaker 3
Yeah. So Ross, I think you have to think about this in context of some of the other developments in the marketplace, specifically the unmanned vehicles. That's changing that marketplace and changing the applications. So in that example, towed streamer example, we are applying commercially developed technology, our solar streamer, reconfiguring that to be applied in a maritime security or ASW type applications. What we think we bring to the table is a robust economical solution that doesn't cost multimillion dollars and having the production capacity to bring it to market very quickly is a big advantage.
So it's a combination of taking what we already have, making it a new application plus the the changes in the marketplace.
Speaker 2
And that that technology that we're bringing yeah. I'm sorry. Just one one No. Please. Go ahead.
Yeah. Ross, the the technology that we're bringing, you know, from the streamer exploration side, seismic exploration side, is a newer technology than some of the traditional passive array technology that's been out there for a number of years. As Rob said, certainly more economical and more robust. So there are some differences.
Speaker 5
Okay. And with the unmanned vehicles, the Air Force is putting a lot of effort into what might be called the loyal wingman problem, the idea of of working with drones, effectively force multiplying manned aircraft. The Navy is supposedly, I've been told, doing the same type of thing, looking at the ability to submarines into, know, turn manned submarines into effectively almost controllers of armed and capable unmanned vehicles, often smaller. Is some of the market you see tied into that type of program where the Navy would be able to and the Chinese as you mentioned, Chinese have substantial submarine fleet. The U.
S. Is actually significantly under submarine and is falling behind even our prior expectation to what we needed it to be. And so it seemed that there's gonna be a lot of energy and a lot of money put into this idea of underwater loyal wingman. And is your technology involved in that?
Speaker 3
Absolutely. Yes, that's exactly the same thing sort of thing we're looking at.
Speaker 2
And multiple products, both sonar side and then on passive eraser.
Speaker 5
Okay. And with regard to your European partner, what markets outside The U. S. Are you guys working on at this point in time or what markets do you see as offering significant opportunities? I know the Australians, for example, have been sinking a lot of money into anti submarine warfare and submarine capabilities and the like.
But where in the world do you see these opportunities coming up?
Speaker 3
Well, think all over the world other than obvious places such as Korea, China, Iran, places like that. But I think there are opportunities in Europe most definitely. There are other opportunities in the Pacific Rim without a doubt. So it's wide ranging.
Speaker 2
And we don't preclude the US Navy as well. Oh yeah yeah yeah.
Speaker 5
Yeah. I wasn't precluding it. I was just looking at it. It seems that there are a lot of opportunities elsewhere. So basically, this is you could fall under US technology.
So therefore, do you need US approval to sell your technology?
Speaker 3
Well, it's subject to certain export controls as our stuff is today. That's nothing new for us. Which export controls kind of depend on the product and what's included in it. So the short answer is yes, but that's nothing new to us.
Speaker 5
Right. Okay. Well, this is very exciting. It looks like we have to wait for Godot for some time. We might finally be getting off the beach and that's pretty exciting.
Thanks.
Speaker 3
You bet. We're working hard.
Speaker 5
I appreciate it. Thanks guys.
Speaker 2
You bet. Thanks Ross.
Speaker 0
This does conclude the question and answer portion of the call. I would like to turn the call back over to management for final comments.
Speaker 3
Okay. Thanks, operator. Thank you for joining us today, taking your time to talk to us. We look forward to talking to you again at the end of our fourth quarter. Thanks very much.
Speaker 0
Thank you. This does conclude today's program. You may disconnect your lines at this time and thank you for your participation.