MIND Technology, Inc. (NASDAQ:MIND) Q3 2023 Earnings Call Transcript

MIND Technology, Inc. (NASDAQ:MIND) Q3 2023 Earnings Call Transcript December 14, 2022

MIND Technology, Inc. misses on earnings expectations. Reported EPS is $-0.3 EPS, expectations were $-0.18.

Operator: Greetings and welcome to the MIND Technology Fiscal Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host from Ken Dennard. Thank you. You may begin.

Ken Dennard: 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 have got a few housekeeping 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 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 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. And now with that behind me, I would like to turn the call over to Rob Capps. Rob?

Rob Capps: Okay, thanks, Ken. Now we are doing something little bit different this quarter. We have prepared an updated presentation covering our discussion this morning and we posted it to our website and invite you to refer to that at your leisure. As I usually do, I will begin with some observations regarding the third quarter and on the market environment. Mark will then discuss the financials in more detail. And I will wrap things up with some remarks about our outlook. As you 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 our better than expected fourth quarters 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 are seeing in each of our three 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 these 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 are 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 three 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 multi-beam side scan sonar systems, which we believe is related to these demands.

We believe our high speed systems are particularly attractive for missions 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 uncrewed platforms. We have been encouraged by the response arising from our demonstration of this technology at the U.S. Navy’s Coastal Trident 2022 exercise in August of this year. Therefore, we are confident we will 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 are experiencing in various markets. And we believe that our products are uniquely positioned to benefit from the strengthening macroeconomic environment. Now, I will let Mark walk you through the third quarter financial results in a bit more detail. Mark?

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Mark Cox: 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% 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, 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 will now pass it back over to Rob for some concluding comments.

Rob Capps: 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 are continuing to see. We think these factors and the market trends I discussed earlier are strong indicators that we are 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 have 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 to 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 everyday 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 timelines. Although liquidity continues to be a challenge, we are diligently working to reach a resolution and hope to do so in a non-dilutive or minimally dilutive way. We expect to resume payment of dividends, including any previously deferred at some point, but not yet made a decision as to the timing of that. We believe the best is yet to come from 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 are optimistic that our fourth quarter results will demonstrate our profitability. We will look to carry that momentum into our fiscal 2024. With that operator, we can now open the call for some questions.

Q&A Session

Operator: Thank you. Our first question comes from the line of Tyson Bauer with KC Capital. Please proceed with your question.

Tyson Bauer: Good morning, gentlemen.

Rob Capps: Hi, Tyson.

Mark Cox: Good morning.

Tyson Bauer: 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 and where you are as a company, which would imply kind of you are 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?

Mark Cox: 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 is certainly some aspect of that. We are seeing some stuff move from Q3 and Q4. But we still anticipated increase in Q4. So you are right, we probably need a bit beyond that, $9 million to $10 million, which €“ that’s what we see going forward. May not be every quarter, but as a general trend, that’s what we are seeing.

Tyson Bauer: Okay, sure. We view the level that you produce in Q3 kind of that base revenue, where that’s derived primarily from services, parts, some reoccurring aspect of that revenue base?

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

Tyson Bauer: 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?

Mark Cox: Correct.

Tyson Bauer: 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?

Mark Cox: Obviously, might be, I am 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 will just going to leave it at that.

Tyson Bauer: And have you had discussions in their willingness to assist in your balance sheet issues?

Mark Cox: Yes, I don’t want to go there, Tyson.

Tyson Bauer: Okay. You talked about backlog expected profitability before recruiting 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?