• Tue. Sep 22nd, 2020

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Technology

MIND Technology (MIND) CEO, Rob Capps on Q2 2021 Results – Earnings Call Transcript

MIND Technology Inc. (NASDAQ:MIND) Q2 2021 Earnings Conference Call September 15, 2020 9:00 AM ET

Company Participants

Rob Capps – Co-Chief Executive Officer, Chief Financial Officer

Guy Malden – Co-Chief Executive Officer, Executive Vice President, Marine Systems

Ken Dennard – Investor Relations

Conference Call Participants

Tyson Bauer – KC Capital

Ross Taylor – ARS Investment Partners

Operator

Greetings and welcome to the MIND Technology fiscal 2021 second quarter conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded

It is now my pleasure to introduce your host, Mr. Ken Dennard. Thank you, Mr. Dennard. You may begin.

Ken Dennard

Thank you Operator. Good morning and welcome to the MIND Technology fiscal 2021 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 will be available for 90 days via webcast by going to the Investor Relations section of the company’s website at mind-technology.com, or 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, September 15, 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 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 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 filing with the SEC, including its annual report on Form 10-K for the year ended January 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 this call are covered by these statements.

Now I’d like to turn the call over to Guy Malden. Guy?

Guy Malden

Thanks Ken, and good morning everyone. We would like to thank you for joining us today for our fiscal 2021 second quarter conference call.

Though the shadow of the COVID-19 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 margin 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-19 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 our marine technology 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 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.

Overall the completion of this process marks an important time in the development and evolution of MINE 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 now turn the call over 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&A.

Rob Capps

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 recorded 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.

Let me first review the financial results of our continuing operations, which consists of our marine technology products business.

For the second quarter, revenues from continuing operations totaled $5.1 million, down about 25% from $6.8 million in the second quarter a year ago but up almost 60% from $3.2 million in the first quarter of fiscal 2021. Seamap revenues were down year-over-year to $4.1 million in the quarter from $5 million in the year ago quarter but were up 84% sequentially. Second quarter revenues from Klein were $1 million, a decrease from $1.8 million a year ago and down about 19% sequentially.

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 have introduced logistical challenges that have impacted our results. Let me give you an example of that.

In the second quarter, we completed a Sealink related order with a value of about $1.7 million; however, 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 million, which was down from $2.8 million a year ago but up from half a million dollars 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 million for the second quarter of fiscal 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 this year was $2.4 million as compared to an operating loss of $1.7 million posted in the year ago quarter and a $6.1 million loss in Q1 of this year. Our second quarter adjusted EBITDA from continuing operations was a loss of $1.5 million compared to a loss of about $700,000 in last year’s second quarter and a loss of $2.5 million in Q1 of this year.

MIND’s capital structure is debt free and liquidity remains solid. At the end of the quarter, we had over $22 million of working capital that included cash and cash equivalents of about $2.6 million. 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 and financial obligations of restricted 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 our leasing 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 requests for quotes. As Guy said, customer interest has been robust but this hasn’t yet manifested in order activity due to both a more cautionary environment and the many restrictions and regulation present in the markets that we serve. As a result, our firm order backlog at $7.6 million at the end of the second quarter was down from the first quarter backlog of $10.2 million.

With that, let me turn things back over to Guy for a few closing comments before we take your questions.

Guy Malden

Thanks Rob.

Based on our own visibility, the continuation of challenging economic fundamentals and restricted 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 SASS, for both commercial and military markets. 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.

SASS 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 U.S. 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.

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 the call for questions.

Question-and-Answer Session

Operator

[Operator instructions]

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

Tyson Bauer

Good morning gentlemen.

Guy Malden

Hey Tyson.

Tyson Bauer

The 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 in the land lease side, where then once we got the asset sold, which I see is $6.6 million, that that would just work its way off the income statement and the balance sheet?

Rob Capps

It’s really an accounting rules issue. We had announced that we were 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. We don’t really get a choice.

Tyson Bauer

Given all you’ve seen on marine, just because you treated land separately, that’s why it got segmented out?

Rob Capps

That’s exactly right. There’s some specific rules as to what constitutes a discontinued operation and exiting a segment of your business, as defined in the accounting rules, is one of those criteria.

Tyson Bauer

Okay. It would appear that cumulative currency effects and depreciation, everything just kind of gets thrown into this quarter and more or less is a clean-up situation?

Rob Capps

That’s one way to look at it. It’s the CTA, the currency translation loss, estimated disposal costs, things of that nature, so that’s exactly right.

Tyson Bauer

Okay, and when do you anticipate realizing that $6.6 million of assets turning into cash?

Rob Capps

Well, the $6.6 million is the carrying value. That doesn’t necessarily reflect what we expect to realize on it, but as we’ve said when we made the announcement, we expect to do it within 12 months. It could be shorter than that, but it’s something we’re working on now.

Tyson Bauer

Okay. The $1.6 million PPP loan that you received, do you expect that to be forgiven or will you hold that and incur the 1% interest rate?

Rob Capps

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

Tyson Bauer

Okay. Given you have a lot things to run into this quarter and you 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?

Rob Capps

I think all things considered, we think we can hold our own. I don’t want to be specific as to projections, but I think we can feel we can hold our own somewhat with the activity with the leasing business, as well as the other operations.

Tyson Bauer

Okay. You announced some completed tests for the U.S. 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?

Rob Capps

Tyson, that’s a difficult thing to answer. There are a variety of entities that we’re dealing with there, a variety of programs, so it’s really difficult to project. I’m really reluctant to make any forecasts there.

Guy Malden

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

Tyson Bauer

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

Guy Malden

Yes, absolutely.

Rob Capps

Yes, sure.

Tyson Bauer

In the original announcement with the European partner, it was alluded to sometime during the fall, which was a vague time period, but we should see further announcements on possible product 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?

Rob Capps

Well, I think beyond what Guy said, I’m not sure I’d say much more. I think the time frame is holding up. We’re pretty much on schedule with that, so I think in the coming weeks and months, you’ll see more and more come out on that.

Tyson Bauer

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

Rob Capps

I think from ourselves, from this side.

Tyson Bauer

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, a pipeline size? Are we talking $5 million to $10 million, $10 million to $20 million, larger depending on the programs, if they’re multi-year accordion features? Give us a sense of what we’re talking about that led to changing the name, changing to Delaware, discontinuing–? Give us a sense of why shareholders should remain patient.

Guy Malden

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

Rob Capps

Those would be system sales, yes.

Guy Malden

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

Tyson Bauer

So even with that $1.8 million sale that should be recognized in Q3, you’re still anticipating Q3 to be similar to Q2 even with that additional system sale in there. Is that correct?

Rob Capps

It’s in that ballpark. Again, you have to understand the uncertainty in the marketplace right now has not gone away, but that’s how we see it today.

Tyson Bauer

Okay, thank you gentlemen.

Operator

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

Ross Taylor

Okay, well most of the questions I have were already answered – that’s the problem with following Tyson.

Can you describe how the revenue split is going to go with this new partnership, the European partnership? Is it going to 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?

Rob Capps

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

Ross Taylor

Okay, that’s good. Does the setup there, 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?

Guy Malden

Yes.

Rob Capps

Absolutely, yes.

Ross Taylor

And is part of the purpose of this from the European side to give them better access into the U.S. market?

Rob Capps

I think that is one aspect of it, yes, as well as entrance into the commercial market, non-military market worldwide.

Ross Taylor

Okay, good, so basically 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 from this, and you’re an important part of this process for them?

Rob Capps

Yes, that’s what we think, for sure. They had choices.

Guy Malden

Yes, they’d look at it that way as well.

Ross Taylor

Okay, and how does this impact any current initiatives you might have with the U.S. government?

Rob Capps

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

Guy Malden

That’s the important piece, is that we were missing the SASS in our portfolio, and this gives us–this fills out the portfolio with the SASS offering.

Ross Taylor

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

Rob Capps

Yes, yes.

Ross Taylor

Okay. When you talked about multiple entities just in answer to Tyson’s question, does 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?

Rob Capps

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

Ross Taylor

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

Rob Capps

Sure.

Ross Taylor

Okay, so basically what you’re seeing is you’re seeing an expanded interest across the Navy in your technology?

Rob Capps

I think that’s fair to say.

Guy Malden

Yes.

Ross Taylor

Okay. Is some of this, do you believe, tied into the fact that with the increasing use of autonomous underwater vehicles, 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 GPS exists so that air launched and sea launched cruise missiles could hit their targets, not so that you could find a 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 any hotspots pretty significantly and also pretty regularly, just to make sure that if they need to deploy underwater vehicles, unmanned 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?

Guy Malden

It’s definitely related to the fact that there’s a 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 yes, it is driven by vehicles, both surface and underwater.

Ross Taylor

Well, it’s exciting, although I do feel like [indiscernible] times I’ve walked into an airing of Waiting for Godot, but my hope is that Godot does show up pretty damn quickly.

Rob Capps

Ross, we understand, we feel that way sometimes too. Certainly the environment we’re in hasn’t helped things at all [indiscernible], but I understand.

Ross Taylor

But you do feel that you–with this environment, you feel that the importance of what you’re providing should top–I mean, you 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 going to–they’re not able to move ahead with other programs that are pretty important to them, it would seem, so one would hope the Navy starts to find ways to get things done.

Thank you, gentlemen.

Guy Malden

Yes, one comment, Ross. One factor, the ocean has only been explored–6% of the ocean has been explored, has been mapped, so there’s a tremendous amount of unmapped areas out there, so not just the U.S. Navy but translate that around the world. There’s going to be a lot of activity, ocean-related activity.

Ross Taylor

Well, it definitely does appear–I mean, as you 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 like–.

Guy Malden

You’re absolutely right, so it’s efficiency and–it’s efficiency as well as image quality and imaging improvement.

Ross Taylor

Yes. 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.

Rob Capps

Okay, thanks Ross. Appreciate it.

Operator

Our next question is coming from the lien of Tyson Bauer with KC Capital. Please proceed with your question.

Tyson Bauer

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

Rob Capps

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

Tyson Bauer

Because it looks like given your current margins, you really are looking at you need to do, what, approximately $10 million 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 million a quarter?

Rob Capps

That’s kind of the ballpark, that’s right. You’ve just got to do the math.

Tyson Bauer

Okay. On the SASS offering, usually you guys in your technology that you’ve been doing with Klein, you’re trying to offer an off-the-shelf technology that can be integrated with existing vehicles that are out there in 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? Which way are you going – 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 vehicle manufacturers?

Rob Capps

It’s a bit of both, Tyson. What we’re trying to do is offer a much more affordable solution than the multi zillion dollar that you see from the big guys, yet much higher quality of a product from a resolution standpoint, so a little bit of both. We’re trying to meet in the middle, find a happy medium there.

Tyson Bauer

And the technology side [indiscernible] really from the European partner standpoint, can you give us a little detail on how many years they’ve spent on trying to develop this and the money they’ve spent putting into this?

Rob Capps

Many years and many millions.

Tyson Bauer

Okay, and then you be the manufacturer, correct?

Rob Capps

That’s correct.

Tyson Bauer

Okay. All right, thank you.

Operator

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.

Rob Capps

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

Operator

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

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