MIND Technology Inc. (NASDAQ:MIND) Q2 2023 Earnings Conference Call September 13, 2022 9:00 AM ET
Company Participants
Rob Capps – President, Chief Executive Officer
Mark Cox – Vice President, Chief Financial Officer
Zach Vaughan – Dennard Lascar Investor Relations
Conference Call Participants
Tyson Bauer – KC Capital
Ross Taylor – ARS Investment Partners
Operator
Greetings and welcome to the MIND Technology fiscal 2023 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, Zach Vaughan with Dennard Lascar Investor Relations. Thank you, you may begin.
Zach Vaughan
Thank you Operator. Good morning and welcome to the MIND Technology’s fiscal 2023 second quarter 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 have a few items to cover. If you would 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 until September 20. Information on how to access this replay was provided in yesterday’s earnings release.
Information reported on this call speaks only as of today, Tuesday, September 13, 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 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-K for the year ended January 31, 2022.
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 our conference call this morning are covered by these statements.
Now I would like to turn the call over to Rob Capps.
Rob Capps
Okay, thanks Zach. I’d like to begin by making some observations regarding the second quarter and on the market environment. Mark will then discuss the financials in more detail. At the end, I’ll wrap up things with some remarks about our outlook.
We’re pleased to report that our fiscal 2023 second quarter results came in as expected. Revenues were about $8.7 million, which is up 28% over last year’s second quarter and slightly below the first quarter revenues of $9.1 million. Importantly, our operating loss improved to approximately $1.6 million compared to $2.6 million in last year’s second quarter and $2.5 million in the first quarter this year. When compared to the first quarter of this year, we saw an improvement in gross margins coupled with lower selling, general and administrative expenses and lower research and development costs.
As a company, we believe MIND is uniquely positioned to capitalize on the tailwinds that we’re seeing in each of our key markets. The sustained global energy prices continued to drive robust order activity in the marine seismic industry. Our marine survey business has also seen an uptick in interest resulting from those same high energy prices as attention shifts towards alternative forms of energy, such as wind farms. The ongoing global, geopolitical and security situation has also highlighted the need for our maritime security technology, therefore we’re optimistic we’ll continue to grow our book of business in the coming quarter as we look to execute on the growing demand.
Our backlog as of July 31, 2022 was approximately $19.3 million, which is up from $13.1 million at the beginning of this fiscal year. In addition to this backlog of firm orders, we are pursuing 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. As I’ve mentioned previously, we believe there is positive momentum in each of our three key markets – that’s exploration, defense and survey.
Strength in global energy markets is driving demand in the exploration space as many of our customers are reporting improving metrics and, in some cases, looking to expand their fleets. That’s good news for us. GunLink, BuoyLink, and SeaLink products continue to enjoy broad acceptance in this space. Activity surrounding alternative energy products such as offshore wind farms is resulting in an increased demand within the survey market. 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. We recently introduced higher sampling rates for SeaLink, which produces higher resolution images. That resulted in increased interest in these three dimensional high resolution systems.
The global geopolitical situation particularly in Europe and Asia has resulted in increased interest in maritime surveillance and security systems. We have recently experienced increased order activity particularly for our multi-beam side scan sonar systems, which we believe is related to these demands, and we also think this bodes well for our program to utilize our commercially developed towed seismic arrays at SeaLink as passive sonar arrays and anti-submarine warfare and other maritime security applications, particularly those for utilizing un-crewed platforms.
Now let me turn over to Mark and let him walk you through our second quarter financial results in a bit more detail.
Mark Cox
Thanks Rob, and good morning everyone. As Rob mentioned earlier, revenues from continuing operations totaled $8.7 million in the quarter, a 28% increase when compared to the $6.8 million in the same period a year ago. Gross profit from continuing operations in the second quarter was $3.5 million, up approximately 59% when compared to the second quarter of fiscal 2022. This represents a gross profit margin of approximately 40% for the quarter, which is up from the 33% we achieved during the prior year second quarter and the 36% reported in the first quarter of this year. The improved margin during the quarter was attributable to further reductions in expenses and greater absorption of fixed costs as a result of higher sustained revenue levels.
Our general and administrative expenses were $3.8 million for the second quarter of fiscal 2023, which was down from $4.3 million in our first quarter. 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 professional and travel fees. Our research and development expense was $844,000 for the second quarter, which was down nearly 17% sequentially. 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 second quarter of this year was $1.7 million as compared to $2.7 million loss in the second quarter of fiscal 2022. Our second quarter adjusted EBITDA from continuing operations was a loss of $1 million compared to a loss of $1.8 million in the second quarter of fiscal 2022 and $1.9 million in the first quarter of this year. We see this as a significant improvement indicating a positive trend.
As of July 31, 2022, we had working capital of approximately $15.6 million and cash of approximately $833,000. We continue to have no funded debt or outstanding obligations aside from normal trade obligations. 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.
Rob Capps
Thanks Mark.
We’re encouraged by the orders we’ve received to date as well as 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. This also gives us confidence that our financial performance will continue to improve and that results for the second half of fiscal 2023 will exceed those in the first half.
Based on current delivery schedules, it is likely we’ll see a fall-off in third quarter as compared to the second; however, we then expect significant improvement in the fourth quarter. Should those expectations be met, we believe MIND will report profitable fourth quarter with positive income from continuing operations. Of course, this is not without challenges and risk. Supply chain issues, changing delivery requirements, government contracting processes, technical and production challenges are all things we must deal with every day and that impact production and deliveries. Nonetheless, we feel good about where the company sits today and believe these positive market trends will continue in future periods. We also believe we will enjoy increasing contributions from our development programs.
As you know, last quarter we made the decision to defer payment of the dividend on our preferred stock. As we said at the time, this was done to preserve our financial flexibility and ability to fulfill current and expected orders. We do 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 remain unwavering in our belief for the future of MIND Technology and think we are beginning to demonstrate that potential with increasing order flow and improving financial performance.
With that, Operator, we can now open the call for some questions.
Question-and-Answer Session
Operator
[Operator instructions]
Our first question comes from the line of Tyson Bauer with KC Capital. Please proceed with your question.
Tyson Bauer
Yes, good morning gentlemen.
Rob Capps
Hey Tyson.
Tyson Bauer
Just a couple of quick questions. Are you still maintaining your revenue expectations – approximately high 30s, $40 million on the top end for this year? Obviously given all the variables that could change the schedule of this, is that still kind of your inkling to put out there as an expectation?
Rob Capps
Yes, I think it’s in the ballpark. Again, we expect the second half to be better than the first, so we kind of did the math on that, so that’s definitely in the ballpark.
Tyson Bauer
Okay, and given–is it just a timing issue with Q3 and Q4, so the fact that you may be producing hypothetically a $14 million quarter in Q4, don’t take that number and run with it, that’s just a function of Q3 and Q4, kind of not knowing how that timetable and schedule is going to be?
Rob Capps
Yes, there’s some [indiscernible], you’re right. There’s some relatively large orders involved and so it slips a week and it can have a big impact.
Tyson Bauer
Okay. Any time you have large orders or a big quarter expectation coming up, obviously you have the working capital requirements that are built into that. You’re not necessarily in a great position, you’ve had some aces up your sleeve that you’ve been able to do. Just kind of give us that cash management and expectation to meet those requirements to fulfill those large orders without requiring capital, and if you do require capital, does that not necessitate being made whole on those preferred dividends, which you would like to do maybe early next year, so how does that tricky timetable work out that we want to be able to do those large contracts, but we may need capital to do so, which means that we really should be current on our preferred dividends?
Rob Capps
Yes, I understand. There’s various things we’re looking at, Tyson. You’re right – managing liquidity is important for us right now because big orders do require capital, working capital to execute, so things we’re looking to do is managing working capital – we still have significant working capital in the form of receivables and inventory, so we’re able to monetize that to some degree. Some of the contracts, pending contracts, we attempt to negotiate pre-payments in some cases to help mitigate and fund those purchasing requirements for those contracts. We continue to look to try to monetize some non-strategic assets such as the remaining lease pool assets. We also have some owned real estate that we think there’s some opportunities to monetize in a non-dilutive way, so those are kind of the top things.
As you’ve noted, we also consider do we go look for outside capital, so that’s something just out of prudence we want to consider and look at on a regular basis. Obviously our aim there is to avoid or at least minimize any dilution that might come from that, so that’s at the forefront of our mind.
As it ties into the preferred dividends, that may or may not be a factor. As I said earlier, we definitely intend to reinstate those and get those current, again we just need to look at the timing of that as it factors into all these other issues.
Tyson Bauer
Well, seeing as financially your first realistic opportunity to make those current would have to be post this fiscal year or after fourth quarter, where you’re probably in a better financial position?
Rob Capps
Potentially, potentially. But again, if we’re able to monetize some of the other assets, it might be sooner than that.
Tyson Bauer
Okay, that would be wonderful. Your European JV status, obviously a lot of location-wise would dictate that you’re probably utilizing that relationship with some of your European opportunities, especially with the geopolitical events that you talked about. Do we start to see those revenues in that Q4, or is that really a next fiscal year situation?
Rob Capps
Thanks for that. The joint venture is more next year than this year. There could be some this year, but probably more next year. There are benefits from the geopolitical situation in Europe that I think we’re already starting to see, that they’re not necessarily tied directly to that relationship, so there are other opportunities for us outside of that as well.
Tyson Bauer
So everything we’re seeing right now is just on your own cognizance or your own ability? We have yet to even see the benefits of that JV play out?
Rob Capps
I think that’s a fair statement.
Tyson Bauer
Okay. Backlog, 19.3. You also said that there’s a significant amount of what you would call high confidence that may not necessarily be in that number, but you’re fairly certain or feeling good about. I’m guessing you’re not going to give me a hard number, but give us a sense of what that implies. Is that something that could increase that backlog 50%, 30%, something in that ballpark?
Rob Capps
It’s a significant amount. Again, the timing for deliveries varies to a large degree. A lot of that, almost all of that, actually, will be going to next year, I would say, but it’s a comparable number to what we’re seeing in the backlog. And understand that there’s a whole litany of different probability and different size and timing of these orders, so things we’re pursuing are early stage, others are a lot firmer in our mind, and the ones I’m trying to refer to are things that are much firmer in our mind.
Tyson Bauer
Okay. Obviously the backlog of 19.3 to be able to hit your revenue targets, that must be all that you anticipate being delivered this fiscal year?
Rob Capps
Not quite all of it, but the majority of it, the vast majority, yes.
Tyson Bauer
Okay. Are we getting later in the year where new orders fall into the next fiscal year, or are you capable of receiving new orders and delivering this fiscal year?
Rob Capps
Oh, for sure. We can certainly receive orders and deliver in a couple of weeks, and we have lots of that. I think as far as any very large systems, especially on the seismic side, those will tend to go into next year just because of lead times for certain components, certain aspects of the systems. But yes, we certainly are able to have a book-and-bill business [indiscernible] – you know, spare parts, smaller systems, things like that, most definitely.
Tyson Bauer
Servicing, all those things.
Last one, kind of give us a little more color on that pipeline. You described that survey is really picking up, obviously defense given the climate we’re in, is very positive, and then energy prices at maintained elevated levels. So when you’re looking at that pipeline, how are you breaking that down between defense, seismic, survey?
Rob Capps
It’s really across the board. Obviously from our market position, we really had a strong position in the seismic side, the energy side, so we’re seeing a lot of benefit there. In some areas, we really have no competition, so that’s a real benefit for us. But we’re seeing a marked uptick in the survey space, especially very recently. I think the application of our SeaLink product in that area is really getting some interest right now, and of course we’ve talked a lot about defense and that’s kind of across the board.
Tyson Bauer
Got it. That sounds great, gentlemen. Thank you.
Rob Capps
Yes.
Operator
Thank you. Ladies and gentlemen, as a reminder, if you’d like to join the question queue, please press star, one on your telephone keypad.
Our next question comes from the line of Ross Taylor with ARS Investments. Please proceed with your question.
Ross Taylor
Thank you. It’s always hard to follow Tyson because he leaves [indiscernible] uncovered. A couple of things. One, obviously with the stock price trading where it’s at, equity issuance is really not an option. It would seem to me that you’d be better off to consider the strategic alternative of selling the company, as opposed to trying to issue equity at what would basically be such an incredibly low price, it would just dilute the hell out of your shareholders. That’s a comment.
Second, you commented on the idea of the towed array opportunities in defense using SeaLink and the like. Was that an incoming concept? Is that a concept that others, you know, defense agencies and other countries, perhaps, or in the U.S. have come to you and said, we think this works, or is this something you guys have looked at and said, maybe it works?
Rob Capps
Early on, I think it’s something we looked at and said, hey, this might work because we have a commercially developed, robust system that could be applied in these or used in these applications. What’s really driven it is the use of un-crewed or unmanned platforms for these sort of applications, so you have smaller systems, cheaper than a conventional or historical sonar array that’s going to be many millions of dollars, so it’s a developing concept but one that’s getting a lot of traction and a lot of interest, not only in the U.S. but elsewhere as well.
We actually did a demonstration two weeks ago with the U.S. Navy that we’ll be receiving soon, so I think there’s a–that’s something that we’ve not see any contribution yet from that, but I think that’s something that could be really interesting going down the road for us, really interesting.
Ross Taylor
Okay, and as you said, this works and the idea is both for surface–unmanned surface vehicles, as well as unmanned underwater vehicles?
Rob Capps
It’s more surface vehicles, I think is the initial application. Conceptually, yes, but I think due to some technical issues, it’s more likely to be applied on unmanned surface vessels initially.
Ross Taylor
Okay, cool. Also, while Tyson asked a question about the fourth quarter, basically probably in some ways better to look at the second half as a half, do you see this fourth quarter being strong enough to pull the second half overall into profitability, and do you believe that it sets the stage so that 2023 calendar year should be a year in which we actually see positive EBITDA and positive profits, in essence the company kinds of switches over from the perpetual loss building to the income generation phase?
Rob Capps
It’s possible that we’ll see the back half positive. I think it’s a closer call on that, but that’s certainly within the realm of possibility. I do think that that’s going to set the stage for a higher base level of business going forward, so we’re going to get out of this, as you say, this perpetual loss. I’m not saying we’re not going to have some ups and downs from quarter to quarter – that’s certainly going to be the case as long as you have large orders, but I think it is going to set the stage for recalibrating where we are.
Ross Taylor
So basically after years of wandering in the desert, you think 2023–and I have a map downstairs, every time they got to the edge, they turned left instead of right, but you think that you should get out of the desert in this year, in ’23?
Rob Capps
That’s what I think. That’s what I think, Ross.
Ross Taylor
Okay, well that would be, obviously, a huge home run if that could happen.
Do you see any issues–it looks like we’re probably going to end up with some form of continuing resolution in Washington. Are any of the programs you’re working on going to be negatively impacted if Congress cannot come to grips with a new defense budget?
Rob Capps
I think for things that are near term, no. Hard to say – you know, some of the things are a little farther out and it might have some impact. It’s really hard for me to comment on that. Don’t know for sure, but I think as far as anything that’s near term that we’re counting on, I don’t see an issue there.
Ross Taylor
Okay, well congratulations on the improved quarter. Early hopes that you are right that we wander out of the desert into the land of profitability in ’23 – I think that would be something shareholders would–we’ve been quite patient for a long time, it would be nice to reward that patience with tangible developments, so thank you very much and keep it up.
Rob Capps
Okay Ross, appreciate it.
Ross Taylor
Thank you.
Operator
Thank you. Ladies and gentlemen, that concludes our question and answer session. I will turn the call back to management for any final comments.
Rob Capps
Okay, I’d just like to thank everyone for joining us today and look forward to talking to you again at the end of our third quarter. Thanks very much.
Operator
Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
Be the first to comment