Q3 2021 Mind Technology Inc Earnings Call
Greetings and welcome to mine technologies third quarter 2021 conference call at this time of all participants are in the listen only mode.
The question and answer session will follow the GAAP results he said.
If anyone should require operators. The says three of the conference. Please press star zero on your telephone keypad. As a reminder of this conference is being recorded it is now my pleasure to introduce Mr. Ken Dennard. Thank you you may begin.
Thank you operator, and good morning, everyone and welcome to the Mark Technology. The school 2021 third quarter Conference call.
We appreciate all of you joining us today. Your hosts are Rob Capps total Chief Executive Officer, and Chief Financial Officer the dog.
The total Chief Executive Officer, and Executive Vice President of Marine systems.
Before I turn the call over the management of abnormal housekeeping details to run through the <unk>.
Like the listen to the replay of todays call. It will be available for 90 days via webcast by going to the Investor Relations section of the company's website at mine Dash technology Dot com.
Or a record of since the replay will be available until December of love It.
The 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 Friday December Force 2020, and therefore, you're advised the time sensitive information may no longer be accurate as of the time of the replay listening or transcript freely.
The full with again, 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 backing out the pod.
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 book control. The may cause the couple of these actual future results from performance the materially different from any.
The results or performance expressed or implied by the statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the EPS you see including the channel reports on form 10-K for the year ended January 31st 2020. Furthermore, as we start this call. Please also refer.
Parts of 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 the state, but that's the part of you know like to turn the call over to Guy molded not.
Thanks, Karen and good morning, everyone.
I'd like to thank you for joining us today for our fiscal 2021 third quarter conference call.
Conditions in the global Marine industry remain challenging due to the lingering the impacts of COVID-19, and the growing number of restrictions and regulations. The have emerged as the result.
However, we continue to make progress and build momentum in both our day to day operations as well as our longer term strategic growth initiatives.
With that in mind, let me begin by making some general comments about the CIRCOR.
I will then take the opportunity to outline what we consider to be important market trends emerging in the marine industry, how they fit into our future growth plans and what we are doing to capitalize on them.
Turning now to the third quarter.
Well COVID-19 negatively impacted our operations due the lingering uncertainty in travel restrictions.
The quarter progressed, a bit better than we had anticipated.
As we mentioned during our second quarter call, our expectation had been the third quarter revenues would be roughly flat with the second quarter.
However, we managed to achieve nearly a 29% sequential improvement in revenues, despite the restrictive macroeconomic environment.
As I stated in our previous call. We believed the pandemic and its consequences have weighed heavily on our customers and hampered their willingness to commit to expenditures.
Despite that there still is the healthy level of inquiry and bid activity in the marketplace.
We feel that that was an ideal time to highlight and review our approach to the global Marine market. Since we've recently completed our comprehensive reincorporation and rebranding.
And they're also in the midst of exiting our legacy seismic land leasing business.
With these actions either completed or in progress.
It's helpful to review, our vision and outline our longer term initiatives for the company and how we plan to build on the momentum we've established to pursue our identified growth opportunities.
So let me start by outlining our target markets before I review of the trends that we see developing in those markets and how we plan on leveraging our capabilities to take advantage of the opportunities. The these trends provide.
Looking at the marine industry based on our target markets, we provide our technology to three major segments.
First of the exploration market, which includes marine seismic exploration and survey activities conducted to support decision, making on engineering and renewable energy projects as well as oil and gas and other mineral exploration.
We estimate that serviceable market size, which is the portion of the market that we can serve with our current and planned products to be roughly $440 million per year.
Second the survey market, which is made up of search and recovery activities as well as hydrographic and construction surveys is estimated to have an annual serviceable market size of about a $150 million.
The third the defense market, which is made up of applications such as mine countermeasures and anti submarine warfare and Maritime security is estimated to have the serviceable market size of about $750 million per year.
So all told these three market segments yield the combined estimated serviceable market size of about $1.3 billion a year.
Given the size of the opportunities available to us our goal over the next five years is to grow our annual revenue of $240 million with EBITDA margins in excess of 20%.
We anticipate that most of the growth will be driven organically with the help of our strategic initiatives, which I will address shortly.
The remaining balance will be driven by strategic partnerships and acquisitions.
Now within those three market segments, there are certain developing market trends the represent significant growth opportunities from mind.
As we now see it those trends include the following.
First the proliferation of unmanned or unproved marine vehicles be the surface are underwater vehicles for the commercial and military markets.
These are often referred to as <unk> unmanned surface vehicles, or U.S. fees and autonomous underwater vehicles or eight of these.
The second growing customer demand for higher resolution sonar images.
And third the need for alternative technology solutions for anti submarine warfare and maritime security to counter the growing maritime security concerns such as the rapid acquisition of conventional submarines in regions such as southeast Asia.
In order to address these trends and better exploit the opportunities we have established certain strategic initiatives.
For instance to address the growing market need for uncrowded and or unmanned vehicles, we have focused on providing sensor packages tailored specifically to these vehicles, enabling customers to obtain a more complete solution and easier integration into their platforms.
Similarly to address the growing customer need for greater resolution sonar imaging we've.
We've recently partnered with the major European defense contractor in a mutually beneficial arrangement to produce synthetic aperture sonar.
The type of side scan sonar that can yield much higher resolution images.
Finally in the area of Maritime security, we are applying the existing commercially developed technology, such as our solid streamer product to provide more cost effective practical solutions to this developing market.
Furthermore, our substantial existing production capacity enables us to eliminate a significant barrier to entry and produce these items quickly and economically versus more traditional solutions.
No initiatives like these plays a critical part in the development of our company as we look to expand and add new technology and applications to the marine market.
We feel that they are in very natural progression from our existing sonar and seismic capabilities.
It's my hope that this discussion has enhanced our understanding of how we plan to leverage our core competencies and utilize the existing technologies in new unique and innovative solutions to expand into new markets.
Let me now turn the call over to Rob who will discuss our financial results in more detail and add some closing comments before turning the call over for Q1 day.
Okay. Thanks Guy.
I'll begin by giving a more detailed review of the third quarter financial results, but first let me remind you that our legacy of leased operations are classified as discontinued operations and our continuing operations are composed entirely of our marine technology products.
Revenues from our continuing operations totaled 6.5 million in the score up nearly 29% sequentially from 5.1 million in the second quarter of fiscal 2021.
You may recall the during the second quarter, we completed the $1.8 million ceilings related order, but the customer is unable to take delivery of that time due to cope with the related transportation issues. You know as we anticipated. This order was successfully completed during the third quarter.
The third quarter gross profit from continuing operations was 2.3 million up from 2 million of Q2.
This represents a margin of 35%, which was down from the 40% achieved in the prior quarter. So the.
The decrease of margins from the result of higher product testing and sustaining engineering activities. During this period.
Our general and administrative expenses were 3 million for the third quarter fiscal 2021, which is essentially flat sequentially.
Research and development expense was 912000, a 21% from the second quarter of this year the.
This increase was mostly due to activity related to our passive shown on the right strategic initiative and then the included cost associated with the deployment of the test system.
Our overall operating loss from continuing operations for the third quarter of this year was 2.3 million as compared to an operating loss of 2.4 million of the sequential quarter of this year.
Our third quarter adjusted EBITDA from continuing operations was a loss of 1.5 million, which was about flat with Q2 of this year.
And we are making progress on sale of relaying leasing business. Despite the impact of covered all of that business.
So the assets totaling over $700000 during the quarter. This process will continue through the balance of this year and likely into the first half of fiscal 2022.
Hi, its capital structure of liquidity remained solid at the end of the quarter, we had over $21 million of working capital that included cash and cash equivalents of over 2.6 million.
No funded the other the two governmental assistant slows the.
Lean flexible cost structure and the pending silver lead leasing business, we are well positioned for the current environment and foreign ventral recovery.
Despite all of the continuing co the driven volatility in the market we.
We are still seeing healthy levels of customer interest.
Has been an uptick in the inquiries from Chris for quotes and orders of light.
And the most recent example of this would be the recent orders for drilling systems and upgrades to be delivered in Q4 ended the first quarter of next year.
We believe that the increased interest the we've seen from numerous from numerous customers and our source controller technology is indicative of improving activity within the range seismic exploration market.
Our from order backlog now stands at 8.2 million at the end of this third quarter the up sequentially from $7.6 million at the end of the second quarter.
Although the effects of cobot market fundamentals can wreak havoc on the timing the pace of our orders.
Nonetheless, seeing improvement in the global Marine markets.
As we have emphasized before heighten the logistical hurdles and uncertainty around customer spending will continue to be a factor in short term vis build visibility, but we.
We currently expect fourth quarter results from our range adults products business. The show a profit from third quarter levels and that this trend will continue into fiscal 2020 true.
Oh, no hopes of outlook does not mean, the we can now of return to our normal operating procedure.
He will remain guarded and watchful and assistant Mark conditions and should conditions take turn from the worst we stand ready to make further adjustments to our operations the cost structure.
Our balance sheet affords us the good measure flexibility towards raising additional capital should the need arise.
Our focus on the operational execution in the middle of implementation of our strategic initiatives will remain the most in our minds.
We look to build on our strengths and innovative new technologies to our portfolio, while also harnessing and adapting proven technologies and the novel New solutions that can economically address the needs of the global marine marketplace.
During the these principles will take us a long way towards completion of our transformation and the ultimate realization of our long term strategic goals.
That concludes our former comments at this time, we'll be happy to open up the laws for your questions.
Operator.
Thank you we will now be conducting the question and answers. The question if he would like to ask the question. Please press star one on your telephone keypad.
Income from Macy until the indicate your line is in the question queue. You May Press star two if he would like to remove your question from the Q and for participants using speaker equipment. It may be the sorry to pick up your handset before pressing the sorry he is.
Our first question is from Tyson Bauer with KC capital. Please proceed.
Good morning, gentlemen.
Great I just want to test.
In the third quarter of the you made the comment that the somewhat beat your expectations going into the quarter. You knew the source controller was going to debt are you at a thought that was going to happen what part of the Q3 results were you of pleasantly surprised by the.
That you achieved that you did not expect going into the quarter.
It's mostly on the the exploration market the seismic exploration market or most of the other source controller activity.
As well as repair activity spare parts things like that just kind of general uptick in activity, we're seeing in that net area right now.
Okay. So it has more to do with.
The outlook and the activity on a bidding.
Possible orders in the future that was the unexpected pleasant surprise for you.
Yeah, that's right I mean, there is no one single order.
Order the contributor that is the number of smaller ones kind of added up so again, just general the uptick in activity.
And the new order that you announced a couple of days ago.
Probably in the range of what we've seen in the past between the 1.52 million range that would be added into the backlog you had at the end of October.
Yeah. Those are a of upgrades the last few things or upgrade system. So those can vary but theyre typically north of the million dollars.
Can be bit more EBITDA less but that's just gives the sense of magnitude.
R&D was up due to the testing I'm guessing that was more so with the military on some of those test of your completing should we anticipate staying at that level or higher R&D spend as you try to get that new product launch with your partner in Europe.
And the additional activities with that partnership.
We had a bit of a spike in the third quarter as we put out this test system for passage of a right. It was deployed it well on the east coast on the in the Ocean.
So that contributed to some of that like R&D activity in general of wells.
To be the same Joe the level, we've seen recently, but that was a bit of the spike I think.
Okay. So we'll return back kind of that the three quarters of a million range.
Yeah, roughly in any given quarter you could see from activity picked up especially for the test systems things like that.
And the cash flow statement, you have 1.6 million from P.P.P.
So is that the then officially been forgiven you do not have to pay that back and what additional foreign reimbursement did you get on payroll expenses and other initiatives by those countries.
Well the baby P. Hasnt been officially forgiving yet we've made application that's going through the process. We anticipate most if not all of to be forgiven and there are there is a few hundred thousand from foreign programs, the Singapore UK things of that nature of the exact number in front of me, but it's a few hundred thousand.
Okay. So if I go there.
Not so much in the core of that was really earlier in the year right. So if I go through those numbers you had 2.7 million an assets sales what I call. It a roughly about 2 million and reimbursements by various government activities PPP and the other ones you just mentioned and a 1.3 million in flow from common stock sale, that's about $6 million.
Dealers, bringing in the door to help off the balance sheet.
Thats hard to replicate while the obviously you have the assets sales that you still have to complete or next year.
But at some point, we're going to have to get the cash flow from operations.
Get the scaling our we really.
Okay go ahead.
Absolutely I mean of course, you're looking at on a year to date numbers of course, not quarterly numbers. So year to date numbers, you're looking at but you're right on the Covance is definitely slowed down our our timetable.
To put us where we are comfortably on a net.
Cash flow positive quarter after quarter, but we see the path. There. Most clearly there is some uncertainty from you know given the of the environment that we definitely see the path to it.
And what was the related to that common stock proceeds.
Oh, yes, we have an ATM, we put in place we tested the market of it to see what the Mark.
Look like average lot of that's one much that's what it was.
Okay and was that done too.
This institutional or in the general market or was that specific the insiders.
No it's in general in the market.
Okay.
You talked a lot of assets sales being completed by the first half of the next year.
Should we see any activity there in this next quarter the quarter. We're currently in that would give you some cushion.
Well I think we'll still see some activity this quarter most of all.
Okay and we.
What was the thought I get this question a lot by some of your institutional holders and that of what was the thought process. Many of the thought process behind putting assets large numbers from that five year target given the difficulty of the company has been in achieving those financial results or progress what was that trigger that chip.
The point that said you know we're now at that point, we're confident we're comfortable we can put out a 1.3 billion market the addressable.
I'll now we can go after or a 140 million in five years, 20% margin right, what what occurred or what happened that said all right now of the time, we can do that we got the you know nice up our sleeve.
It's going to be a stair step it's going to be a gradual trajectory just give us a little sense of why all of us on the we've we've gone to this route.
Sure of it so it's not so much as all of the sudden the main as Weve been building towards this Tyson up we've done the redid. The rebranding yeah, we made the decision to exit the land business.
And we saw some of the strategic initiatives of the Guy referred to start to develop.
And we just felt like the times right to the less assess what the market looks likely to share that with our with our shareholders asked of what we think our potential looks like.
Yeah, we're not there yet but.
But you know, we see that market, there and we see a path to that level. It's these are these are big markets were addressing the their new markets for us.
The other new applications of our exists and existing technology. So we just is a combination of things there's no one thing the.
Uh huh.
It's there, but a number of things started to come together again through the strategic initiatives the the partnership in Europe.
Our European partner, you know that was one of the things stop by itself, but one of the things you know the.
Indications, we see with our our streamer technology to ask of rights gave some confidence.
The of the.
Reception, we're getting for our Max technology, our GAAP filler technology, and how we think that's going to enhance the zone.
The acceptance of our overall side scan sonar products and that we can apply the into unmanned vehicles. So again all of these things came together, we just sort of is the right time to the share of that and is it more of a stair step effect in the year won a pending X contract week or the you know materially improve ourselves and our position and.
The off that base for a step too or is this more of a hockey stick where in year, three or whatever or for all the standard we'll see an exponential type growth scenario.
Scenario.
Yeah, I mean, that's tough to predict.
I think we see that as building gradually but.
Given the nature of some of these markets were pursuing a you can tend to get the gets a bit of the of the stairstep from time to time, but those are difficult to predict so we're looking at more of a gradual.
Increased but there certainly is the opportunity for the for the big step.
Okay. Thank you gentlemen.
Yes, you bet. Thanks.
Our next question is from Ross Sandler with.
All right.
Please proceed.
Thank you, it's always the golf and following Tyson.
[laughter].
Can you give us a little bit more color on.
Were you specifically see your technologies, bringing the advantages to the market versus the current technology as an example in total Ray how all of this the current technology and why do you see what you're doing being a significant improvement in that area.
Yeah. So Robert so thank you have to think about this in context of some of the other developments in the marketplace specifically the unmanned vehicles.
Changing marketplace and changing the applications [noise].
The net debt example, the the towed Streamer example, you know.
We are applying commercially developed technology.
First of all the streamer reconfiguring that.
To be applied in a maritime security yes.
W type applications.
Well, we think we ran at the table is a robust economical solution.
That does it cost of multimillion dollars.
And having the production capacity to range the market very quickly is the big advantage. So it's the combination of taking what we already have making and the new application plus the changes in the marketplace.
The net debt to now is that we're bringing debt.
Just one Oh. Please go ahead.
Ross the technology that we're bringing.
From the streamer.
Exploration side of the seismic exploration side.
Is it a.
Newer technologies and some of the traditional passive of Ray.
Technology, that's out there for a number of years as Rob said, certainly more economical and more robust. So there are some differences.
Okay and with the unmanned vehicles. The airports the put is putting a lot of effort into what might be called the loyal when men problem. The idea of Oh the program by the of working with drones.
The force multiplying manned aircraft. The Navy is supposedly I've been told doing the same type of thing looking at the ability to turn the submarines and two manned submarines into effect of the almost controllers of.
On the <unk> and.
Capable unmanned vehicles, often smaller it some of the market you see tied into that type of program. One of the Navy would be able to and the Chinese as you mentioned the Chinese have substantial suddenly leave the U.S. is actually significantly under submarine and as falling behind the even our prior.
Expectations of what we needed to be until it seemed that there was going to be a lot of energy and a lot of money put into this idea of underwater loyal wing man and is your technology involved in that.
Absolutely, yes, yes, that's exactly the same thing sort of thing, we're looking at and multiple products, both sonar side and then of the past from Russia.
Okay and with regard to your European partner.
What markets outside the U.S. So you guys are you guys working on at this point in time of what markets do you see as offering significant opportunities I know the Australians for example of been thinking a lot of money into anti submarine warfare and submarine capabilities and the like but where in the world do you see these opportunities coming up.
Well I think all over the world other than the obvious places such as the Korea China.
The ramp looks places like that [laughter].
But I think there are opportunities in Europe. Most definitely there are other opportunities in the Pacific rim, We got it out right. So that's why the range and we don't preclude the U.S. Navy as well.
Yeah, I wasn't precluding. It I was just looking at it seems that there are a lot of opportunities elsewhere. So basically this is you could fall under U.S. technology.
So therefore do you need a U.S. upper.
Approval to sell your technology.
Well the is subject to certain export controls.
As our stuff is today, that's nothing new for us and you know, which export controls the kind of the pin on the product and what's included in it. So the answer is short answer is yes, but that's nothing new to us.
Right. Okay, well this is very exciting it looks like we have to waiting for good though for some time, we might finally be getting off the beach and that's pretty exciting. Thanks.
Yeah, we're working hard [laughter] I appreciate it thanks guys.
Okay. Thanks Ross.
This does conclude the question and answer portion of the call.
The turn the call back over the management.
And then.
Okay. Thank you operator, thank you for joining us today, taking your time to talk to US. We look forward to talk to you again at the end of our fourth quarter. Thanks very much.
Thank you. This does conclude todays program you may disconnect your lines of the Simon. Thank you for your participation.