Mind Technology Inc (MIND) 2023 Q3 法說會逐字稿

Greetings, and welcome to the MIND Technology Fiscal Third Quarter 2023 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Ken Dennard. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Welcome to the MIND Technology Fiscal 2023 Third Quarter Earnings Conference Call. We appreciate all of you joining us today. With me are Rob Capps, President and Chief Executive Officer; and Mark Cox, Vice President and Chief Financial Officer.

Before I turn the call over to Rob, I've got a few housekeeping items to cover. 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 via recorded instant replay telephonically until December 21. 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, Wednesday, December 14, 2022. And therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control that may cause the company's actual future results or performance to materially differ from any future results or performance expressed or implied by those statements. These risks and uncertainties are included in the risk factors disclosed by the company from time to time in its filings with the SEC, including its annual report on Form 10-K for the year ended January 31, 2022.

Furthermore, as we start this call, please refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements. And now with that behind me, I'd like to turn the call over to Rob Capps. Rob?

Okay. Thanks, Ken. Now, we're doing something a little bit different this quarter. We have prepared an updated presentation covering our discussion this morning, and we posted it to our website. I invite you to refer to that at your leisure. Now as I usually do, I'll begin with some observations regarding the third quarter and on the market environment. Mark will then discuss the financials in more detail, and I'll wrap things up with some remarks about our outlook.

As we mentioned on last quarter's call, we expected our third quarter results to be down a bit sequentially due to the timing of orders which we anticipated delivering in the fourth quarter. While our third quarter revenues of $4.9 million were slightly softer than we had predicted due to orders moving to the right. We believe that this sets the stage for a better-than-expected fourth quarter, during which we anticipate returning to profitability.

We continue to execute on our growing backlog and our order flow remains positively impacted by favorable macroeconomic trends. As a company, we believe MIND is uniquely positioned to capitalize on the tailwinds that we're seeing in each of our 3 key markets: Exploration, Defense and Survey. The sustained global energy prices continued to drive robust order activity in the marine seismic industry.

Many of our customers in the exploration space are reporting improving metrics and in some cases, looking to expand their fleets. Our Gunlink, BuoyLink and SeaLink products continue to enjoy broad acceptance in this space, and we expect our strong order flow in the exploration market to continue through the fourth quarter and into next fiscal year.

Our marine survey business has also seen an uptick in interest resulting from the same higher energy prices as attention shifts towards alternative forms of energy, such as offshore wind farms. In addition to our single beam and multi-beam side scan sonar systems, we're seeing much interest in our SeaLink towed streamer systems for these applications. Recently introduced higher sampling rates for SeaLink, which produces higher resolution images and configurable systems have resulted in increased interest in these 3-dimensional high-resolution systems.

The ongoing global geopolitical and security situation, particularly in Europe and Asia, continues to highlight the need for our maritime security and surveillance technology. We have recently experienced increased order activity, particularly for our multi-beam side scan sonar systems, which we believe is related to these demands. We believe our high-speed systems are particularly with attractive permissions in the defense space.

We also think the recent demand bodes well for our program to utilize our commercially developed towed seismic arrays SeaLink as passive sonar arrays and anti-submarine warfare and other maritime security applications, particularly those utilizing uncrude platforms. We've been encouraged by the response arising from our demonstration of this technology at U.S. Navy's Coastal Trident 2022 exercise in August of this year.

Therefore, we're confident that we'll continue to grow our book of business in the coming quarters as we look to execute on the growing demand and favorable market conditions. Our backlog as of October 31, 2022, was approximately $19.9 million, which is up over 50% from the $13.1 million backlog we reported at the end of fiscal 2022. In addition to this backlog of firm orders, we continue to pursue a number of other opportunities for which we have high confidence.

These orders reflect the continued positive momentum that we're experiencing in various markets, and we believe that our products are uniquely positioned to benefit from the strengthening macroeconomic environment. Now, I'll let Mark walk you through the third quarter financial results in a bit more detail. Mark?

Thanks, Rob, and good morning, everyone. As Rob mentioned earlier, revenues from continuing operations totaled $4.9 million in the quarter, a 41% decrease when compared to the $8.3 million in the same period a year ago. Gross profit from continuing operations in the third quarter was $1.5 million, down approximately 53% when compared to the third quarter of fiscal 2022. This represents a gross profit margin of approximately 31% for the quarter, which was down from the 38% we achieved during the prior year third quarter and the [41%] 40% reported in the second quarter of this year.

As mentioned on last quarter's call, we anticipated lower revenue levels in the third quarter due to the delivery schedules of some larger orders that we expect to be completed in the fourth quarter. The lower revenue resulted in less absorption of fixed costs, which drove gross margin down in the third quarter. Our general and administrative expenses were $3.6 million for the third quarter of fiscal 2023, which was down from $3.8 million in our second quarter of 2023.

As we mentioned last quarter, our G&A expenses tend to taper down as the year progresses. Much of the expenses that we incurred earlier in the year were associated with front-end loaded, payroll taxes, and professional and travel fees. Our research and development expense for the third quarter was $843,000, which was in line with our second quarter. Consistent with prior periods, these costs are largely directed towards our strategic initiatives, including synthetic aperture sonar and passive sonar arrays.

Our net loss from continuing operations for the third quarter this year was $3.3 million as compared to a $2.1 million loss in the third quarter of fiscal 2022. Our third quarter adjusted EBITDA from continuing operations was a loss of $2.7 million compared to a loss of $1.3 million in the third quarter of fiscal 2022 and a $1 million loss in the second quarter of this year.

Although adjusted EBITDA from continuing operations was down during the third quarter, we maintain our expectation of generating positive EBITDA in the fourth quarter. As of October 31, 2022, we had working capital of approximately $12.8 million and cash of approximately $812,000. We continue to have no funded debt or outstanding obligations aside from normal trade obligation.

Also, our cost structure remains largely variable, which gives us flexibility to respond to changes in market conditions. I'll now pass it back over to Rob for some concluding comments.

Thanks, Mark. Despite the expected pullback in our third quarter results, we remain encouraged by our growing backlog of business and the robust interest and customer engagement that we're continuing to see. We think these factors and the market trends I discussed earlier are strong indicators that we're on the right path.

If you look ahead to our fourth quarter, based on our backlog and current delivery schedules, we expect to generate revenue of between $12 million and $14 million during the quarter. That level of revenue, we expect to generate positive earnings from continuing operations. We have significant orders that we anticipate delivering during the quarter. In fact, we've already delivered some. But given our robust backlog and other anticipated orders, we feel that our elevated revenue momentum will continue into next fiscal year.

However, I'd like to make it clear that there will be variation between quarters and not all quarters will necessarily reach the same level as our fourth quarter. But we do believe the general trend will be one of increase in revenue. Of course, this is not without challenges and risks. Supply chain issues, evolving delivery requirements, government contracting processes, technical, and production challenges are all things that we must deal with every day and can impact production and deliveries.

Nonetheless, we feel good about where the company sits today and believe these positive market trends will continue into future periods. We also believe we will enjoy increasing contributions from our development programs, such as synthetic aperture sonar, automatic target recognition, and passive sonar arrays.

In early October, we announced the deferral of our third quarter preferred stock dividend. We took this action to address liquidity demands required to complete our near-term backlog as well as other expected orders. Timing uncertainty of certain receivables makes it prudent that we preserve our financial flexibility as we work to fulfill orders of varying sizes and time lines. Although liquidity continues to be a challenge, we are diligently working to reach a resolution and hope to do so in a nondilutive or a minimally dilutive way.

We expect to resume payment of dividends, including any previously deferred at some point but have not yet made a decision as to the timing of that. We believe the best is yet to come for MIND Technology. We feel that our increasing order flow and improved financial performance in the coming months will indicate our ability to drive meaningful shareholder value. We are positioned to capitalize on numerous opportunities in the coming year and the favorable market conditions continue to support our business in a variety of ways.

We're optimistic that our fourth quarter results will demonstrate our profitability, and we'll look to carry that momentum into our fiscal 2024. With that, operator, we can now open the call for some questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Tyson Bauer with KC Capital.

Just a quick way to view Q3 and Q4. Should we really look at these as a composite, take them together as kind of a second half story on where you are as a company, which would imply kind of you're at a $9 million to $10 million per quarter rate. And at that level, it doesn't seem like that will quite be enough. Obviously, it's a dramatic improvement from where you were, but we need 20%, 30% more. Is that in what you see going forward that we can achieve those to try to lessen some of that liquidity risk and other business risk?

Yes, I think so, Tyson. I wouldn't exactly average the two, third and fourth quarter to give a run rate, it's not quite right. I mean there's certainly some aspect of that, we're seeing some stuff move from Q3 into Q4, but we still anticipate an increase in Q4. So you're right, we probably need a bit beyond that $9 million to $10 million, which that's what we see going forward. It may not be every quarter, but I think as a general trend, that's what we're seeing.

Okay. Should we view the level that you produced in Q3 kind of that base revenue where that's derived primarily from services, parts, some reoccurring aspect to those -- that revenue base?

I mean, I guess it's fair to say that most of that activity was of that nature. Again, there are some anomalies in Q3 just because of timing of things. So I wouldn't necessarily leave it at that level going forward.

Okay. And when we look at the fiscal '23 results and the backlog, that still is absent of any contribution from your JV partner in Europe, which is expected for next year.

That's correct.

Any sense or any color you can provide there to kind of give us some sense of the meaningful or the material impact that could have to get you that 20%, 30% more revenue?

Obviously, I'm going to be very cautious with my comments here. I mean we are progressing dramatically on that front. Obviously, we wouldn't be making this sort of investment unless we anticipated a significant return from that. So I'll just kind of leave it at that.

And have you had discussions and their willingness to assist in your balance sheet issues?

Yes. I don't want to go there, Tyson.

Okay. You talked about backlog, expected profitability before accruing the deferred dividend. Where do you anticipate your cash and where do we look to be at the end of this fiscal year as far as your liquidity position with a strong fourth quarter?

I don't want to project the cash balance at this point. But we are delivering throughout the quarter. We've already delivered things. So that will have an impact of the things we delivered later in the quarter, so you won't see that at year-end. There are a variety of areas we're addressing to attract liquidity, obviously, AR and by implication inventory as we liquidate and sell things. We're not having to buy things since we have so much inventory already, had already bought it.

We continue to generate some funds from our legacy leasing assets. That amounts -- those amounts are decreasing, but there still is some activity there. As we've said in the past, we have some opportunities to monetize some unencumbered assets, specifically some real estate assets we have. And so we're pursuing all of those areas.

Okay. And the discontinued ops, is that just kind of a cleanup number of -- because it looks like you don't have assets held for sale on your balance sheet. So did you go through the process and chose to write off any remaining asset values there, although you may have those that you could sell at a later date, which almost reverses what you've just taken off?

Yes, right. So we -- the remaining assets from the leasing business are -- have zero book value. So they've been written to 0, but there still are some assets that we are hopeful of being able to monetize.

That would be in that roughly $1.6 million range?

Again, it's from 0 to something like that.

Okay. You talked about that you've already made significant deliveries for the fourth quarter. Any idea of percentage of expected revenue since you gave the expected revenue range that you've already delivered and have in pocket?

Yes. Again, I don't want to be very specific, but there are substantial deliveries throughout the period, and I'll leave it at that.

Okay. When you look at your working capital and given the outlook that you just provided and then you look at the market valuation of your preferred stock that is accumulating that preferred dividend. Can -- is there a rationalization for that? It doesn't seem like the numbers really work out. And given the level of importance to your direct JV partner and really indirect relationship with Mitsubishi, what are we missing here?

I guess, I don't understand the question, Tyson, I'm sorry.

So the question really is that you've got a, what, $9 million valuation on the preferred dividends at $5.60 a share. You've already had 2 deferred. You really can't do much as a company without becoming true or current on the preferred dividend that is deferred. The marketplace seems to have chosen to say, hey, that working capital number they have, that inventory number, that ongoing business number, we just don't believe it. Even though you have preference on those preferred shares, is there something that you want to add or that you want -- I'm going to throw you a little softball here, that would say, hey, the numbers just don't add up as far as why we're getting value there, especially on the preferred side compared to what you're seeing as a management team?

Okay. I now understand. I mean obviously -- maybe not obviously, but we have a different opinion as to what the market value ought to be, both the preferred and the common. Lots of reasons that contribute to the -- where the price is where it is, but we firmly believe that as we demonstrate the growth in the business, demonstrate the ability to generate ongoing cash flow, that view from the market is going to change dramatically. There's no reason for it not to, in my view.

But you would share that even on a salvage valuation, if you really went that route, you're significantly ahead of where the market is applying a valuation on you.

Absolutely. I'd certainly absolutely believe that myself.

Thank you, gentlemen.

(Operator Instructions) Our next question comes from the line of Ross Taylor with ARS Investment Partners.

And I always seem to play second fiddle to Tyson. I want to pick up on where Tyson was going with this. We've said those of us who have held stock for several years have heard this as a story that's about to break out -- were about to break out. I feel we're a little bit waiting for Godot on the beach.

This year, the stock has lost 75% of its value. You've got the preferred trading at about a little over 20% of its book value. I think what Tyson was being polite and dancing around and giving you the chance to say is that this company is worth, I think, a lot more dead than it is currently alive. And as a holder and someone who's been a patient holder, I would say, this has to be the year, this next year, fiscal '24 the year that you'll be reporting the fourth quarter of in early '25. You need to sell this company if you can't make this business work. You can't keep asking your investors to be patient when being patient means you're losing -- this was a $2 stock, it's now -- or $1.60. It's now a $0.40-something cent stock. It's really getting to be old. And quite honestly, we're not seeing insider buying.

One thing I would think might send a real message is if insiders were buying the stock aggressively, indicating that they believe in this company. You can buy a lot of shares when your stock trades at $0.40-something cents a share. So I would hope to see as soon as we get into the open period, insiders starting to commit capital into the common because that would be a real vote that there is residual value here.

And as I said, in this next year, get this thing working, get it profitable, get it so it generating enough free cash flow that you can pay the dividend on a regular basis, and that moves back towards book value and the stock starts to move back at least towards where it was a year ago. And I'd love that, you know, give your thoughts on why aren't we seeing insider buying? And why are we continuing to kind of press this with the idea that it's going to work if we haven't yet seen it work.

Well, there are lots of reasons. There was some insider buying earlier in the year. There has been some, not a great deal, but some. Obviously, there are restrictions from time to time as to what we, insiders can do, given what we know that may or may not be public information. So there -- I'll just make a comment there are some limitations there.

Ross, I understand your frustration. We share it as well. That's why we think that where we stand now going into the fourth quarter is a big change, and we are starting to see that transition. I hear your message and hear loud and clear. But we do think we are seeing that turn around in this fourth quarter.

You've said you're going to be a $100 million revenue run rate business even with the projections of the fourth quarter, which I assume is picking up $3 million, $4 million, $5 million from the third quarter. You're at the high end of your range, something in the neighborhood of about $50 million to $60 million run rate business.

How long is it going to take once we kind of cross this Rubicon, which you're indicating we're crossing in this quarter we're currently in? How long is it going to take to get from that mid-$50s million run rate annually to the $100 million you've been talking about. You know your book, you're not buying. If you guys aren't buying in as insiders, you're telling me that there's something out there that you know that's going to be material. Just surviving literally would be material given the way the stock is priced.

So how long is it going to take to get to that $100 million run rate? And as I said, I just think that your shareholders, you can see it, no one cares and you've got to create -- if you can't get people to care, then you've got to just say, fine, I'll give you -- we'll sell this business and we'll let you move on. So how long are you going to take to get to that, you know, your $100 million target?

I don't want to give us a period of time. We talked about a 5-year period before. Obviously, we've eaten into that. Some things happened in the marketplace. So it's not going to be next year, it's probably going to be the year after, but it's certainly very attainable, we still believe. And I think as we get to these higher levels, things start to build upon themselves. And I think you see the growth start to compound a bit as we're able to layer on some of this additional activity.

I know that doesn’t answer you specifically, but…

No, I think we're at that stage where -- and you know it, you see it, we need action, and in lieu of action, what we really need is insider support, and we need to get the company to where we can get the preferred dividends paid. So then you can be moving forward off of that and we can return the value to the equity.

As Tyson is implying, I think if we shut this company down today, I think that the preferred holders would get paid book value, and I think that the equity holders would make multiple bags on what was left. So let's get it there. I think that you can't expect your holders to have patience and so I think you need to execute and if you're -- the people you're working with, you're an important provider to them. You have skills and you have capabilities and technologies that no one else has. That's very valuable. They're not going to let you fail, but they need to do more than just keep you alive, they need to let you prosper.

Understood. Thanks. Appreciate it.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Capps for any final comments.

Yes. I'd like to thank everyone for joining us this morning, and we look forward to talking to you again after our fourth quarter. Thanks very much.

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