MIND Technology, Inc.

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's now my pleasure to introduce your host, Zach Vaughn, with Denard Laskar Investor Relations. Thank you. You may begin.

Thank you, Operator. Good morning and welcome to Mind Technology Fiscal 2023 Second Quarter Comforts 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 a recorded instant replay until September 20th. 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 13th, 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 this 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 and its filings with the SEC, including in 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.

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 of this year. And 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 continue 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 quarters as we look to execute on the growing demand. Our backlog as of July 31st, 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. So that's good news for us. GunLink, BuoyLink, and SeedLink 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 C-Link towed streamer systems for these applications. Recently introduced higher sampling rates for C-Link, which produces higher-resolution images, have 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 total seismic arrays at SeaLink as passive sonar arrays in anti-submarine warfare and other maritime security applications, particularly those for utilizing uncrewed platforms. So now let me turn it over to Mark and let him walk you through our second quarter financial results in a bit more detail.

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's 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 toward 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. You 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.

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 the third quarter as compared to the second. However, we then expect significant improvement in the fourth quarter. Should those expectations be met, we believe mine will report a 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 line 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.

Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Tyson Bauer with KC Capital. Please proceed with your question.

Good morning, gentlemen.

Hey, Tyson.

Just a couple 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?

I think it's in the ballpark. Again, we expect the second half to be better than the first. We kind of do the math on that, so that's definitely in the ballpark.

Is it just a timing issue with Q3 and Q4, so the fact that you may be producing a, hypothetically, a $14 million quarter in Q4, don't take that number, run with it. That's just a function of three and four, not knowing how that timetable and schedule's gonna be.

Yeah, there's some impact to that, you're right. There's some relatively large orders involved, and so it slips a week, and it can have a big impact.

Okay. Anytime 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?

Yeah, I understand. So, I mean, there's various things we're looking at, Tyson. I mean, 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 prepayments 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 noted, we also consider, do we 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 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, just need to look at the timing of that as it factors into all these other issues.

Well, it seems financially that 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.

Potentially, potentially. But again, if we're able to monetize some of the other assets, that might be sooner than that.

Okay, well, that would be wonderful. Your European JV status, obviously a lot of just location-wise would dictate that you're probably utilizing that relationship with some of your European opportunities, especially with the geopolitical events that you've talked about. Do we start to see those revenues in that Q4, or is that really a next fiscal year situation?

I think for the joint venture, it's more next year than this year. There could be some this year, but probably more next year. But there are benefits from the geopolitical situation in Europe that I think we're already starting to see that are not necessarily tied directly to that relationship. So there are other opportunities for us outside of that as well.

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.

I think that's a fair statement.

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?

It's a significant amount. Again, the Timing for deliveries, you know, varies to a large degree. A lot of that, almost all of that, actually, we go into next year, I would say. But it's a comparable number to what we're seeing in backlog. And, of course, understand, you know, that there's a whole litany of, you know, different probability and different size and timing of these orders. So some things we're pursuing. Our 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.

Okay. So 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?

Not quite all of it, but the vast majority, yeah.

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?

Oh, for sure. We can certainly, you know, receive orders and deliver, you know, 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, yeah, we certainly are able to, you know, have a book and build business. Spare parts, smaller systems, things like that, most definitely.

Servicing, all those things. Last one, kind of give us a little more color on that pipeline. You described that survey as really picking up, obviously, defense, given the climate we're in, is very positive. And then the energy prices have maintained elevated levels. So, When you're looking at that pipeline, how are you breaking that down between defense, seismic survey?

It's really across the board. Obviously, from our market position, we really have a strong position in the seismic side and 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 really seeing a market uptick in the survey space, especially very recently. I think the application of our C-Link 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.

All right. That sounds great, gentlemen. Thank you.

Yep.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Ross Taylor with ARS Investments. Please proceed with your question.

Thank you. It's always hard to follow Tyson because he leads so little ground 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 you know, such an incredibly low price would just dilute the hell out of your shareholders. That's a comment. Second, you commented on the idea of the toad array opportunities in defense using, was it, C-Link and the like. Is that an incoming concept? Is that a concept that others, that, you know, defense agencies in other countries perhaps or in the U.S. have come to you and said, we think this works? Or is that something you guys have looked at and said, maybe it works?

So 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, used in these applications. And what's really driven it is the use of uncrewed or unmanned platforms for these sort of applications. So you have smaller systems, you know, cheaper than a conventional or historical system. you know, 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're sending soon. So I think that's something that we've not seen any contribution yet from that. But I think that's something that could be really interesting going down the road for us, really interesting.

Okay. And as I said, this works in the idea both for unmanned surface vehicles as well as unmanned underwater vehicles?

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.

Okay, cool. Also, while Tyson asked the question about the fourth quarter, basically, you know, probably in some ways better to look at the second half as a half. Do you see the 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 kind of switch over from the perpetual loss building to the income generation phase.

It's possible that we'll see the back half positive. I think that'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 kind of higher base level of business going forward. So we're going to get out of this, as you say, this perpetual loss. Not saying we're going to have, you know, some ups and downs from quarter to quarter. That's certainly going to be the case as long as we have large orders. But I think it is going to set the stage for kind of recalibrating where we are.

So basically, after years of wandering in the desert, you think 2023 is And I have a map downstairs. Every time they got to the edge, they turned left instead of right. But you think that we should get out of the desert in this year, in 2030?

That's what I think. That's what I think, Ross.

Okay. Well, that would be obviously a huge home run if that could happen. Yeah. 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?

I think for things that are near-term, no. Hard to say. Some of the things that are a little farther out 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.

Okay. Well, congratulations on the improved quarters. Early hopes that you're 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 award that patience with tangible development. So thank you very much and keep it up.

Okay, Ross. Appreciate it.

Thank you.

Thank you, ladies and gentlemen. That concludes our question and answer session. I'll turn the floor back to management for any final comments.

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.

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