MIND Technology, Inc.
Q3 2021 Earnings Call Transcript

Published: 4 Dec 2020

[Operator:]

Greetings. And welcome to MIND Technology’s Third Quarter 2021 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.

[Ken Dennard:]

Thank you, Operator, and good morning, everyone. And welcome to the MIND Technology fiscal 2021 third 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.

[Guy Malden:]

Thanks, Ken, and good morning, everyone. We would like to thank you for joining us today for our fiscal 2021 third quarter conference call. Conditions in the global marine industry remain challenging due to the lingering impacts of COVID-19 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 will 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.

[Rob Capps:]

Okay. Thanks, Guy. And I will begin by giving a more detailed review of the third quarter financial results. But first let me remind you that our legacy leased operations are classified as discontinued operations and our continuing operations are composed entirely of our Marine Technology Products. Revenues from our continuing operations totaled $6.5 million in this quarter, up nearly 29% sequentially from $5.1 million in the second quarter of fiscal 2021. You may recall that during the second quarter, we completed a $1.8 million SeaLink related order, but the customer is unable to take delivery at that time due to COVID related transportation issues. As we anticipated, this order was successfully completed during the third quarter. Third quarter gross profit from continuing operations was $2.3 million, up from $2 million in Q2. This represents a margin of 35%, which was down from the 40% achieved in the prior quarter. So the decrease in margins were result of higher product testing and sustaining engineering activities during this period. Our general and administrative expenses were $3 million for the third quarter of fiscal 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 an included cost associated with the deployment of the test system. Our overall operating loss from continue operations for the third quarter of this year was $2.3 million. This compared to an operating loss of $2.4 million in the sequential quarter of this year. Our third quarter adjusted EBITDA from continuing operations was a loss of $1.5 million, which was about flat with Q2 of this year. We are making progress on 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 in the first half fiscal 2022. MIND’s capital structure and liquidity remains solid. At the end of the quarter, we had over $21 million of working capital that included cash and cash equivalents of over $2.6 million. With no funded debt other than two governmental assistance loans, our lean flexible cost structure and the pending sale of our land leasing business, we are well-positioned for the current environment and for an eventual recovery.

[Operator:]

Thank you. Our first question is from Tyson Bauer with KC Capital. Please proceed.

[Tyson Bauer:]

Yeah. Good morning, gentlemen.

[Rob Capps:]

Hey, Tyson.

[Guy Malden:]

[Tyson Bauer:]

In the third quarter, the -- you made the comment that that’s somewhat beat your expectations going into the quarter. You knew the source controller was going to hit or you had a thought that was going to happen. What part of the Q3 results were you pleasantly surprised by that you achieved that you do not expect going into the quarter?

[Rob Capps:]

It’s mostly on the exploration market -- the seismic exploration market those since other source controller activity, as well as repair activities spare parts, things like that and just kind of a general uptick in activity we are seeing in that area right now contributed to that.

[Tyson Bauer:]

Okay. So it has more to do with the outlook and the activity on bidding possible orders in the future. That was the unexpected pleasant surprise for you?

[Rob Capps:]

Yeah. That’s right. I mean there was no one single order that contributed that is a number of smaller ones kind of ended up. So, again, just general uptick in activity.

[Tyson Bauer:]

And the new order that you announced a couple of days ago…

[Rob Capps:]

Yeah.

[Tyson Bauer:]

… probably in the range of what we have seen in the past between that $1.5 million, $2 million range that would be added into that backlog you had at the end of October?

[Rob Capps:]

Yeah. Those are upgrades. The last few things are upgrade systems. So those can vary but they are typically north of $1 million.

[Tyson Bauer:]

Okay.

[Rob Capps:]

It can be a bit more. It can be a bit less. But that’s just to give you a sense of magnitude.

[Tyson Bauer:]

R&D was up due to testing. I am guessing that was more so with the military some of those tests you are completing. Should we anticipate staying at that level or higher R&D spend as you try to get that new product launch with your partner in Europe and additional activities with that partnership?

[Rob Capps:]

We have a bit of a spike in the third quarter as we put out this test system for passing array. It was deployed on the East Coast on -- in the ocean. So that contributed to some of that. Like R&D activity in general, it will start to -- it will be the same general level we have seen recently. But there was a bit of a spike I think.

[Tyson Bauer:]

Okay. So we will return back kind of that $0.75 million range?

[Rob Capps:]

Yeah. Roughly, again, any given quarter you could see some activity picked that up, especially for that test systems things like that.

[Tyson Bauer:]

Okay. And the cash flow statement you have $1.6 million from PPP. So is 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?

[Rob Capps:]

Well, the PPP has been officially forgiven. Yeah. We have made application that’s going through the process. We anticipate most if not all to be forgiven. And there’s a few hundred thousand from foreign programs, Singapore, U.K., things of that nature. I don’t have the exact number in front of me. But it’s a few hundred thousand.

[Tyson Bauer:]

Okay. So if…

[Rob Capps:]

Yeah. Not so much in the quarter. That was really earlier in the year.

[Tyson Bauer:]

Right. So if I go through those numbers, you had $2.7 million in asset sales, I want to, call it, roughly about $2 million and reimbursements by various government activities, PPP and the other ones you just mentioned, and a $1.3 million inflow from common stock sale. That’s about $6 million bringing in the door to help up the balance sheet. That’s hard to replicate. Well, obviously, you have the asset sales that you still have to complete…

[Rob Capps:]

Right.

[Tyson Bauer:]

… next year.

[Rob Capps:]

Right.

[Tyson Bauer:]

But at some point we are going to have to get the cash flow from operations to get those going. Are we really…

[Rob Capps:]

Yeah. Yeah. Yeah.

[Tyson Bauer:]

Okay. Go ahead.

[Rob Capps:]

Well, so, absolutely. I mean, of course, you look at on the year-to-date numbers, of course, not quarterly numbers, so year-to-date numbers you are looking at.

[Tyson Bauer:]

Yeah.

[Rob Capps:]

But you are right. COVID is 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.

[Tyson Bauer:]

Okay. And what was related to that common stock proceeds?

[Rob Capps:]

We have an ATM we have put in place. We tested the market a bit to see what the market looked on average and that’s wasn’t much, that’s what it was.

[Tyson Bauer:]

Okay. And was that done to just institutional or in the general market or was that specific to insiders?

[Rob Capps:]

No. It’s in general in the markets.

[Tyson Bauer:]

Okay. And you talked about asset sales being completed by the first half of next year. Should we see any activity there in this next quarter and the quarter we are currently in that would give you some cushion?

[Rob Capps:]

I think we will definitely some activity this quarter, mostly in fall.

[Tyson Bauer:]

Okay.

[Rob Capps:]

And we…

[Tyson Bauer:]

What was the thought -- I get this question a lot by some of your institutional holders and that is, what was the thought process behind putting out such large numbers in that five-year target, given the difficulty the company has been in and achieving those financial results or progress? What was that trigger that tipping point that said, we are now at that point, we are confident, we are comfortable. We can put out a $1.3 billion addressable that we can go after or $140 million in five years 20% margin?

[Rob Capps:]

Right.

[Tyson Bauer:]

What occurred or what happened that said, all right now is the time, we can do that. We have got an ace up our sleeve. It’s going to be a stair step. It’s going to be a gradual trajectory. Just give us a little sense on why all of a sudden we have gone to this route?

[Rob Capps:]

Sure. It doesn’t start much as all of a sudden. I mean we have been building towards this, Tyson. We have done -- we did rebranding. We made the decision to exit the land business. And we saw some of the strategic initiatives that the Guy referred to start to develop. And we just felt like the time is 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. Yet, we are not there yet. But we see that market there and we see a path to that level. These are big markets we are addressing. They are new markets for us. They are new applications of our existing technology. So we just -- it’s a combination of things. There’s no one thing, that said, ah-ha, it’s there. But there are a number of things started to come together again through these strategic initiatives with the partnership in Europe -- with our European partner. That’s one of the things. Not by itself but one of the things. The applications that we see with our streamer technology into passive arrays gave some confidence. The reception we are getting for our MA-X Technology, our gas turbine technology. And how we think that’s going to enhance the acceptance of our overall side scan sonar products and how we can apply that into unmanned vehicles. So, again, all of these things came together. We just thought it was the right time to share that.

[Tyson Bauer:]

And is it more of a stair step effect in, let’s say, year one pending X contract. We could materially improve ourselves and our position and work off that base for a step two or is this more of a hockey stick where in year three or whatever or four, all of a sudden we will see an exponential type growth scenario?

[Rob Capps:]

Yeah. I mean that’s tough to predict, Tyson. And I think we see it is building gradually. But given the nature of some of these markets we are pursuing, you continue to get a bit of a stair step from time-to-time. But those are difficult to predict. So we are looking at more of a gradual increase but there certainly is opportunity for the -- for the big step.

[Tyson Bauer:]

Okay. Thank you, gentlemen.

[Rob Capps:]

Yeah. You bet.

[Guy Malden:]

Thanks, Tyson.

[Operator:]

Our next question is from Ross Taylor with ARS. Please proceed.

[Ross Taylor:]

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 are doing being a significant improvement in that area?

[Rob Capps:]

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 that example, the towed streamer example, we are applying commercially developed technology to our sonar streamer, reconfiguring that to be applied in a maritime security or ASW type applications. While we think we bring to the table is a robust economical solution that doesn’t a cost of multi-million dollars and having the production capacity to bring to market very quickly is a big advantage. So it’s a combination of taking what we already have making into new application plus that the changes in the marketplace.

[Guy Malden:]

That can maybe is …

[Rob Capps:]

Now that we are bringing

[Ross Taylor:]

Yeah.

[Guy Malden:]

I am sorry, just one…

[Ross Taylor:]

No. Please go ahead. Yeah.

[Guy Malden:]

Ross, the technology that we are bringing from the streamer exploration side, the seismic exploration side is a newer technology than some of the traditional passive array technology that’s out there for a number of years, as Rob said, certainly, more economical and more robust. So there are some differences.

[Ross Taylor:]

Okay. And with the unmanned vehicles, the Air Force is putting a lot of effort into what might be call the loyal wingman problem the idea or a program idea of working with drones, effectively force multiplying, manned aircraft. The Navy is supposedly I have been told doing the same type of thing, looking at the ability to turn submarines into -- 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 expectations of what we needed it to be until it seemed that there’s going to 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?

[Rob Capps:]

Absolutely. Yes. Yes. That’s exactly the same thing -- sort of thing we are looking at.

[Guy Malden:]

And multiple products both sonar side and then the passive array side.

[Ross Taylor:]

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 is 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?

[Rob Capps:]

Well, I think, all over the world other than obvious places such as Korea, China, Iran, look, places like that. But I think there are opportunities in Europe, most definitely. There are other opportunities in the Pacific Rim, without a doubt.

[Guy Malden:]

Correct.

[Rob Capps:]

So it’s wide ranging.

[Ross Taylor:]

Okay.

[Guy Malden:]

And we don’t preclude the U.S. Navy as well.

[Rob Capps:]

Oh! Yeah. Yeah. Yeah.

[Ross Taylor:]

Yeah. I wasn’t precluding it, I was just looking at -- it seems that there are a lot of opportunities elsewhere. So basically this is you could fall under U.S. technology. So therefore do you need U.S. approval to sell your technology?

[Rob Capps:]

Well, it is subject to certain export controls as our stuff is today. That’s definitely new for us. And which export controls…

[Ross Taylor:]

Right.

[Rob Capps:]

… it kind of depends on the product and what’s included in it. So, I mean, the answer is -- short answer is, yes, but that’s nothing new to us.

[Ross Taylor:]

Right. Okay. Well, this is very exciting. It looks like we have the waiting for Gudope for some time. We might finally be getting off the beach. That’s pretty exciting. Thanks.

[Rob Capps:]

We are working hard.

[Ross Taylor:]

I appreciate it. Thanks guys.

[Rob Capps:]

You bet.

[Guy Malden:]

Thanks, Ross.

[Operator:]

This does conclude the question-and-answer portion of the call. I would now like to turn the call back over to management for final comments.

[Rob Capps:]

Okay. Thank you, Operator. Thank you for joining us today. Taking your time to talk to us and we look forward to talking to you again at the end of our fourth quarter. Thanks very much.

[Operator:]

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