Q3 2022 Mind Technology Inc Earnings Call
Greetings and welcome to the main technology third quarter 2022 conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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 Ken Dennard. Thank you. Mr. Dennard you may begin.
You operator, good morning, everyone and welcome to the main technology fiscal 2022 third quarter conference call.
We appreciate you all of you joining us today.
Your hosts today is Rob Capps, President and Chief Executive Officer, before I turn the call over to Rob I have a few housekeeping items to go through.
If you'd like to listen to a replay of today's call it'll be available for 90 days via webcast by going onto the Investor Relations section of the company's website at mine Dash technology Dotcom.
Or via an instant replay telefonica Lee until December 16th information on how to access. These replay features was provided in yesterday's earnings release.
Information reported on this call speaks only as of today Thursday December 9th 2021 and therefore, you're advised that time sensitive information may no.
A longer be accurate at 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 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 31st 2021.
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'd like to turn the call over to Rob Katz Rob.
Okay. Thanks, Ken I'd like to begin by first making some Australian observations on the market environment before I discuss the financials in detail.
I'll, then wrap things up with our general market outlook.
As you may gather based on our earlier prerelease, we are seeing a noticeable improvement in market conditions with a growing activity in the marine industry is driving a corresponding uptick in our orders as such the favorable trend. We observed in Q2 remains attack with increasing inquiries and order activity spending most of our markets and driving strong suit.
Central topline gains in Q3.
We have made additional progress on the disposal of assets from our legacy leasing business.
As you May remember from our prior call. We entered an agreement to sell a substantial portion of these assets.
We also continued to make good progress on our strategic initiatives, which target growth areas in the marine technology space, such as synthetic aperture sonar passive sonar arrays and sensor systems running in platforms.
With conditions and activity improving we have considerable optimism for our business in the coming quarters. However, I would also note that with external factors such as the new AUM across Covid strain and supply chain disruptions casting a shadow over economic activity worldwide are up to two optimism must remain tempered.
As I've mentioned in the past our quarter to quarter results can swing quite a bit due to changes or delays in customer orders.
With the uncertainty in the global economic environment things can change rapidly and significantly.
That said.
We believe the underlying fundamentals of the marine market are improving and we expect this to hold for the foreseeable future.
Looking at our third quarter results consolidated revenues were up strongly both on a year over year sequential and a sequential basis when.
When compared with last year's third quarter, our total revenues were up by more than 27%.
On a quarter over quarter basis, they were up by 23%.
Due to the delivery of some of our opinion orders during the quarter.
Current backlog of $10 million is down from our Q2 backlog of $11 seven so still up from the $8 2 million backlog posted in Q3 of fiscal 2021.
However, we fully expect additional orders in the near future as customer interest and engagement continues to be quite robust both in commercial and military markets.
Based on engagement with specific customers. We are confident of two significant orders in the coming weeks.
We're still seeing strong levels of inquiries in the bid activity within our three primary markets those being Marine survey marine exploration and maritime security or defense.
In the Marine survey space, we have noted an increase in inquiries and bids for both our single and multi beam side scan sonar systems and believe that this development is poised to drive improvement in Q4 and the coming year.
In the marine exploration market, our source controller and positioning products continue to lead the market.
There are a number of opportunities in this segment and one of the expected orders I just mentioned is in this space.
Although most of our revenue is currently derived from commercial activity. We believe that the defense Maritime security market represents an outstanding growth opportunity for mind.
We are working diligently to build on and expand our presence in the military and governmental organizations.
We have multiple opportunities for multi beam sonar systems for M. C. M. That's mine countermeasure applications yeah.
Other order that I mentioned, a few moments ago is in this particular space.
We think these opportunity opportunities will expand in coming months with the introduction of our synthetic aperture sonar solution.
As Youre already aware global supply chain disruptions continue to weigh on companies around the world. We noted these challenges even before it became more omnipresent throughout the economy and are continuing to manage through the bottlenecks that have arisen because of COVID-19 rising demand and scan supply.
The shortages of certain components and materials, a surge in freight charges and prolonged shipping delays.
A degree of risk is introduced into all financial outlooks.
We've been working to mitigate these risks as much as hospital and believe these issues are temporary and will be resolved in time.
Yeah.
We're also making moving forward on our strategic initiatives.
The development of our synthetic aperture sonar system in partnership with our European Defense contractor partner continues to progress.
Supply chain issues have had some effect on our schedule. We are still hopeful to generate revenue from this project in the fourth quarter with more activity next fiscal year.
The development of our passive sonar arrays for anti submarine and Maritime security applications continues to advance as our prototype systems have been deployed and we continue to add functionality.
These ratings are based on our successful ceiling product line, which is widely recognized and well established in the commercial marine market.
And as I mentioned earlier, we've also seen a recent increase in inquiries and bids are single and multi beam sonar systems.
This bodes well for our ability to play a bigger role in providing sensor assistance to the burgeoning unmanned vessel market.
It also helps address both the commercial and military marine markets demand for higher resolution sonar images.
We are continuing to develop solutions that address these critical market needs either through.
Our internal development of new technologies.
The application of our existing technology into new products.
Strategic partnerships or some combination thereof as.
As an example, we recently launched a new product in this space, what we call. The four K S. P Y R. <unk> survey.
This has been well received and we're starting to see order activity for it.
Okay now, let me walk you through our third quarter financials in a bit more detail before I make some summarizing comments.
As I mentioned earlier revenues from our continuing operations totaled $8 3 million in the quarter, which was up 23% sequentially versus $6 8 million second quarter fiscal 2022.
When compared with our year ago revenues. This was an increase of 27%.
Third quarter gross profit from continuing operations was $3 2 million up from $2 2 million in Q2.
This represents a gross margin of 38%, which is also up from the 33% we achieved in the prior quarter.
The increase reflects the beneficial impact of operating leverage as our higher revenues drove greater overhead absorption.
Our general and administrative expenses were $3 9 million for the third quarter of fiscal 2022.
That was up from $3 4 million in the second quarter due to increases in various costs, such as employment travel and professional fees.
Now in the quarter, we were able to attain three industry conferences for the first time in almost two years.
While that did contribute to some higher cost it was great to be face to face with customers and to demonstrate firsthand the new strategic direction of mind.
Okay.
Our research and development expense was about $826000, which is roughly flat with the second quarter.
These costs are largely directed towards our strategic initiatives such as synthetic aperture sonar passive sonar arrays and sensor systems for unmanned platforms as well as enhancements and upgrades to our other sonar systems.
Our loss from continuing our continuing operations for the third quarter of this year was $2 1 million as compared to $2 7 million loss in the second quarter of fiscal 2022.
Our third quarter adjusted EBITDA from continuing operations was a loss of $1 3 million compared to a loss of $1 8 million for Q2.
For our legacy land leasing business, which of course is classified as discontinued operations, we realized approximately $2 7 million in Q3 asset sales with an additional $2 million or so expected to be realized in the fourth fiscal quarter beyond. This there is some miscellaneous equipment and certain accounts receivable, which will.
Likely to be monetized in the next fiscal year.
<unk> capital structure and liquidity remained solid at the end of the quarter, we had about $14 million from working capital.
We continue to have no funded debt.
Also our cost structure remains lean and flexible associated market conditions take a turn for the worse. We believe that are largely variable cost structure gives us some leeway to reduce our expenses commensurate with any declines in our business.
We also have additional sources of liquidity available to us and.
In addition to the proceeds from the sale of our lane leasing assets as I mentioned, a moment ago. We also received approximately $9 5 million in net proceeds from an underwritten public offering of our preferred stock which was completed last month. Shortly after the close of Q3.
These resources combined with the discretionary actions we may take.
I will give the company versus sufficient liquidity to handle the challenges ahead, while also enabling us to progress in our strategic initiatives and take advantage of opportunities that may arise.
So in sum, although difficulties in potential pitfalls remain and the larger macro environment. We continue to adhere to the view that on the whole things are improving and net revenues from continuing operations for fiscal 2022 will be an improvement over the prior year and this trend will continue into the coming year.
We have a solid backlog and are seeing strong customer interest in the market. This portends.
And eventual inflow of orders.
Hard to say, whether those orders will fall in terms of timing because the supply chain bottlenecks, perhaps some lingering customer apprehension as well.
Therefore, our baseline expectation will be for Q4 to be roughly in line with Q3, but with potential for incremental upside depending on order and production timing in the coming weeks.
Yeah.
We're excited about the improving fundamentals that we're seeing in the marketplace and despite the overhang of the <unk> and supply chain challenges are very optimistic about <unk> prospects in the coming year.
We will continue to execute on our strategy and work towards achieving our long term goals.
Now before you take questions. There is a I'd like to address something else just for a moment.
I think you all know Guy Malden is retiring at the end of this month.
He was here with me today, but he's on assignment in Singapore. This week, so the logistics for him to join the call or problematic.
You guys have been instrumental in our transformation going all the way back to our acquisition I've seen at over 16 years ago.
He and I have been partners for the past few years as we move from the equipment leasing business into the marine technology space.
We could not have made the progress that we have without guy.
For me personally as experience insights and advice have been invaluable and he's become a good friend.
I'm going to Miss his counsel and our daily interactions.
Luckily, however, I know where he lives and I have some number therefore I still plan to lean on him for advice from time to time and I'm pretty sure he'll answer my calls all of this in mind I want to thank guy for all he has done and wish him and Cheryl a great retirement.
So with that operator now we can open the call up for questions.
Thank you.
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Our first question is from.
With Casey capital. Please proceed.
Good morning, Rob.
Awesome.
I also echo those comments you made about guy, except where he may not take my calls.
You May you never know.
You talked about Q3 being kind of the base level as we walk into Q4 because of some supply issues. Some bottlenecks that are going on there.
Are we looking at Q3 as kind of a baseline even beyond Q4, as we eliminate some of the seasonality and some of the Lumpiness.
Going forward with these new orders that are expected in backlog.
Is that kind of the base level that youre looking for for the foreseeable future.
Yes, I think so Tyson.
There's always the risk that you have one order slide.
A few weeks, which has an impact but I think generally speaking that is kind of where we're looking at.
And looking to grow from that.
You know the point I think we wanted to make is given the.
The environment that we're in the supply chain issues.
There is risk out there and we wanted people to understand that risk.
I think that is kind of a baseline we're looking at.
Okay, SG&A, you've talked about that front running some of the revenue as you tried to build that up to secure.
<unk> been at the shows those kinds of things.
What should we see in SG&A as we go forward as we try to get some of these orders procured and marketing some of these new products.
Yeah, I don't see changing dramatically I mean, you might see.
A bit of a swing from quarter to quarter, just as things fall in that I think it's still going to be materially different going forward.
So I think the big thing is we just had better leverage.
As we see the topline increase.
Okay.
Highly confident on the backlog growth these orders that are coming in.
Will those be announced the bowl given the nature of the order and who you're working with and two are these more technology add ons to existing orders that we don't have to go through that bid process, but they are now adding your features too maybe.
Maybe their physical product that already exists and they're building for contract.
Yes and no.
And that certainly there is one kind of like that in entirety for your first question I think they probably will be unanswerable, although what specifics as far as who it is.
There might be some issues there, but I think we will be able to announce in general that we have.
These things in hand.
So it.
In all cases, its not necessarily not add onto existing staff near some new installations.
Involved here.
New customers new areas for us.
Okay, and the SaaS product that you've been enjoying.
Development with has that now been tested and approved by military establishment.
So it is just a function of getting orders and adding that technology too.
Man vehicles or other products.
I'd say, it's the same process is weighed out describe that.
Okay. So that is still something that is.
We're not we're still we're still in a in what you would have called the development stage towards the latter.
Part of that development stages, and we've described that.
Okay.
Given the new cost on the additional preferred.
Got some pushback from institutions.
Revenue to cover that cost now jumps up.
Really closer depending on your variable cost there.
$12 million a quarter is that about right.
And in that ballpark.
We're at eight that implies a significant amount of growth there to cover that additional preferred cost.
Is that something thats in your budget or in your line of sight that no. We think we're comfortable in being able to cover that.
It is it is flashing.
Okay.
These beds and these orders are a lot of these accordion features to them, especially on the military side.
In some cases, yes phenomenon, all cases, sometimes roughly or other cases, it will be so it's a mixed bag.
Okay, and we saw the increase in accounts receivable.
And working capital requirements to do these orders.
Our inventory will be coming up also.
What are you what are you looking at as far as requirements on that for your cash management and the working capital.
As we go forward are we getting into periods that we're going to be tight on capital or we got enough cushion there that that's not a concern anymore.
I think we have enough cushion that's.
That's one reason we wanted to do the offering was we saw the potential need to get out ahead of some of these supply chain issues and be more aggressive in our in our purchasing this gives us the flexibility to do that but we didn't want to have happen as you know have a big order come in and do we just couldnt execute on because as you know we couldnt get stuff. So.
<unk> environment, you have to be more aggressive with your suppliers. So that's good news ordering sooner.
Putting money down to make sure you are first in line things like that.
Becker and <unk>.
Are you able to leverage your partners capability on their procurement of supply that may have a better access to some of these components than yourself.
In some cases, yes, I would say not across the board that there are some specific instances, where we may want to lean on them and they certainly are helpful in that regard.
Okay. So the way it sounds so we will see some growth in the military side with orders on that.
Yeah.
Promise of that future growth should be realized in the coming quarters or the coming weeks really on an order and in the coming quarters as far as results yes.
We're definitely starting to see more activity more more traction in that area I feel good about that alright.
Alright, thank you.
You bet.
This concludes the question and answer portion of our call I would now like to turn the call back over to Rob Katz for any final comments.
Okay, just want to thank everyone for joining us today and I look forward to talking to you again at the for our fourth quarter call early next year. Thanks.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Yeah.
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