Greetings, welcome to the MIND Technology Fiscal Q3 2023 Conference Call. At this time, all participants are in 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, Ken Dennard. Thank you. You may begin.
Thank you operator. Good morning everyone. Welcome to the MIND Technology Fiscal 2023 Q3 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've got a few housekeeping items to cover. If you'd like to listen to a replay of today's call, it'll 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 21st. 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 14th, 2022, 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 31st, 2022. Furthermore, as we start this call, please 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. With that behind me, I'd like to turn the call over to Rob Capps. Rob.
Okay, thanks, Ken. We're doing something a little bit different this quarter. We've prepared an updated presentation covering our discussion this morning, and we posted it to our website. I invite you to refer to that at your leisure. As I usually do, I'll begin with some observations regarding the Q3 and on the market environment. Mark will then discuss the financials in more detail, and I'll wrap things up with some remarks about our outlook. As we mentioned on last quarter's call, we expected our Q3 results to be down a bit sequentially due to the timing of orders, which we anticipated delivering in the Q4.
Our Q3 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 a better than expected Q4, 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're seeing in each of our three key markets: exploration, defense, and survey. The sustained global energy prices continue 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 Q4 and into next fiscal year. Our marine survey business has also seen an uptick in interest resulting from the same higher energy prices as attention shifts towards alternative forms of energy such as offshore wind farms. In addition to our single beam and multibeam side scan sonar systems, we're 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 our multibeam 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 in anti-submarine warfare and other maritime security applications, particularly those utilizing uncrewed platforms. We've 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. We're confident that we'll 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 31st, 2022, was approximately $19.9 million, which is up over 50% from the $13.1 million backlog we re-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're experiencing in various markets, and we believe that our products are uniquely positioned to benefit from the strengthening macroeconomic environment. Now, I'll let Mark walk you through the Q3 financial results in a bit more detail. Mark?
Thanks, Rob. 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 Q3 was $1.5 million, down approximately 53% when compared to the Q3 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 Q3 and the 41% reported in the Q2 of this year. As mentioned on last quarter's call, we anticipated lower revenue levels in the Q3 due to the delivery schedules of some larger orders that we expect to be completed in the Q4.
The lower revenue resulted in less absorption of fixed costs, which drove gross margin down in the Q3. Our general and administrative expenses were $3.6 million for the Q3 of fiscal 2023, which was down from $3.8 million in our Q2 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 and professional and travel fees. Our research and development expense for the Q3 was $843,000, which was in line with our Q2. 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 Q3 this year was $3.3 million, as compared to a $2.1 million loss in the Q3 of fiscal 2022. Our Q3 adjusted EBITDA from continuing operations was a loss of $2.7 million, compared to a loss of $1.3 million in the Q3 of fiscal 2022, and a $1 million loss in the Q2 of this year. Adjusted EBITDA from continuing operations was down during the Q3, we maintain our expectation of generating positive EBITDA in the Q4. As of October 31st, 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 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. Despite the expected pullback in our Q3 results, we remain encouraged by our growing backlog of business and 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. As we look ahead to our Q4, based on our backlog and current delivery schedules, we expect to generate revenue of between $12 million and $14 million during the quarter. At 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've already delivered some. Given our robust backlog and other anticipated orders, we feel that our elevated revenue momentum will continue into next fiscal year.
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 Q4. We do believe the general trend will be one of increasing 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 every day 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 Q3 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 have 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. The favorable market conditions continue to support our business in a variety of ways. We're optimistic that our Q4 results will demonstrate our profitability, and we'll look to carry that momentum into our fiscal 2024. With that, operator, we can now open 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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 keys. Our first question comes from the line of Tyson Bauer with KC Capital. Please proceed with your question.
Good morning, gentlemen.
Tyson.
Good morning.
Just as a quick way to view Q3 and Q4, should we really look at these as a composite and take them together as kind of a second half story on where you are as a company? Which would imply kind of you're at a $9 million-$10 million per quarter rate. 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?
Yeah, I think so, Tyson. I wouldn't exactly, you know, average the two, third, and Q4 to give a run rate. That's not quite right. I mean, there's certainly some aspect of that. We're seeing some stuff move from Q3 into Q4, but we still, you know, anticipated a increase in Q4. You're right, we probably need a bit beyond that, you know, $9 million-$10 million, which, you know, that's what we see going forward. You know, may not be every quarter, but I as a general trend, that's what we're seeing.
Okay. Should 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 to that revenue base?
I mean, I guess it's fair to say that most of that activity was of that nature. There are some anomalies in Q3 and just because of timing of things, so I wouldn't necessarily leave it at that level going forward.
Okay. When we look at the fiscal 2023 results and the backlog, that still is absent of any contribution from your JV partner in Europe, which is expected.
That's correct.
For next year.
Right.
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?
Obviously, I'm gonna 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. I'll just kind of leave it at that.
Have you had discussions on their willingness to assist in your balance sheet issues?
Yeah, I don't wanna go there, Tyson.
Okay. You talked about backlog, expected profitability before accruing 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 Q4?
You know, I don't wanna project a cash balance at this point, but, you know, we are delivering throughout the quarter. We've already delivered things, so that will have an impact. Other things will be delivered, you know, later in the quarter, so you won't see that at year-end. You know, there are a variety of areas we're addressing to, you know, attract liquidity. You know, obviously, you know, AR and by implication, inventory, as we liquidate and sell things, you know, we're not having to buy things since we have so much in inventory already, had already bought it. We continue to generate some funds from our legacy leasing assets. Those amounts are decreasing, but there still is some activity there.
As we've said in the past, we have some opportunities to monetize some unencumbered assets, specifically some real estate assets we have. We're pursuing, you know, all of those areas.
Okay. The discontinued ops, is that just kind of a cleanup number? It looks like you don't have assets held for sale on your balance sheet. Did you go through the process and chose to write off any remaining asset values there? You may have those that you could sell at a later date, which almost reverses what you've just taken off.
Yeah, that's right. The remaining assets from the leasing business have zero book value, so they've been written to zero. There still are some assets that we are hopeful of being able to monetize.
That would be in that roughly $1.6 million range?
Again, it's from zero to something like that.
You talked about you've already made significant deliveries for the Q4. Any idea of percentage of expected revenue since you gave the expected revenue range that you've already delivered and have in pocket?
Yeah. I don't want to be very specific, but, you know, there are substantial deliveries throughout the period, and I'll leave it at that.
Okay. When you look at your working capital and given the outlook that you just provided, and then you look at the market valuation of your preferred stock that is accumulating that preferred dividend, is there a rationalization for that? It doesn't seem like the numbers really work out. Given the level of importance to your direct JV partner and really indirect relationship with Mitsubishi, what are we missing here?
I guess I don't understand the question, Tyson. I'm sorry.
The question really is that you've got a what, $9 million valuation on the preferred dividends at $5.60 a share.
Okay.
You've already had two deferred. You really can't do much as a company without becoming true or current on the preferred dividend that is deferred. The marketplace seems to have chosen to say, "Hey, you know, that working capital number they have, that inventory number, that ongoing business number, we just don't believe it." Even though you have preference on those preferred shares, is there something that you wanna add or that you want. I'm gonna throw you a little softball here that would say, "Hey, the numbers just don't add up as far as why we're getting value there, especially on the preferred side, compared to what you're seeing as a management team"?
Okay. I now understand. I mean, obviously, you know, maybe not obviously, but, you know, we have different opinion as to what the market value ought to be, both of the preferred and the common. you know, lots of reasons that, you know, contribute to the, you know, where the, where the price is, where it is. We firmly believe that, you know, as we demonstrate the growth in the business, demonstrate the ability to generate, you know, ongoing cash flow, then, you know, that view from the market's gonna change dramatically. There's no reason for it not to, in my view.
You would share that even on a salvage valuation, if you really went that route, you're significantly ahead of where the market is applying a valuation on you.
Well, absolutely. I absolutely believe that myself.
All right. Thank you, gentlemen.
You bet.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Ross Taylor with ARS Investment Partners. Please proceed with your question.
Thank you. I always seem to play second fiddle to Tyson. I want to pick up on where Tyson was going with this. You know, those of us who've held stock for several years have heard this as a story that's about to break out. We're about to break out. I feel we're a little bit waiting for Godot on the beach. This year, the stock has lost 75% of its value. You've got the preferred trading at, you know, about a little over 20% of its book value. I think, you know, what Tyson was being polite and dancing around and giving you the chance to say is that this company is worth, I think, a lot more dead than it is currently alive.
As a holder and someone who's been a patient holder, I would say this has to be the year, this next year of, you know, fiscal 2024, the year that, you know, you'll be reporting the Q4 of in early 2025. You need to sell this company if you can't make this business work. You can't keep asking your investors to be patient when being patient means you're losing. You know, this was a $2 stock. It's now or $1.60. It's now a forty something cent stock. It's really getting to be old. Quite honestly, we're not seeing insider buying. One thing I would think might send a real message is if insiders were buying the stock aggressively, indicating that they believe in this company.
You can buy a lot of shares when your stock trades at forty something cents a share. I would hope to see, as soon as we get into the open period, insiders starting to commit capital into the common, because that would be a real vote that there is residual value here. As I said, in this next year, get this thing working, get it profitable, get it so it's generating enough free cash flow that you can pay the dividend on a regular basis, and that moves back towards book value, and the stock starts to move back at least towards where it was a year ago.
I'd love to, you know, give your thoughts on, you know, 1, why aren't we seeing insider buying and why are we continuing to kind of press this with the idea that it's gonna work if we haven't yet seen it work?
Well, there's lots of reasons for. There was some insider buying earlier in the year. There has been some, not a great deal, but some. You know, obviously there are restrictions from time to time as to, you know, what we insiders can do, given what we know, that may or may not be public information. I'll just make a comment. There are some limitations there. You know, Ross, I understand your frustration. You know, we share it as well. That's why we think, you know, that where we stand now going into the Q4 is a big change, and we are starting to see that transition. You know, I hear your message, and hear it loud and clear.
Yes.
We do think we are seeing that turnaround in this Q4.
Yeah. You've said you're gonna be a $100 million revenue run rate business. Even with the projections of the Q4, which I assume is picking up $3 million, $4 million, $5 million from the Q3, you're at the high end of your range, something in the neighborhood of a $50 million-$60 million run rate business. How long is it gonna take once we kind of cross this Rubicon, which you're indicating we're crossing in this quarter we're currently in? How long is it gonna take to get from that, you know, mid-$50 million run rate annually to the $100 million you've been talking about? You know your book. You're not buying. If you guys aren't buying as insiders, you're telling me that there's something out there that you know that's gonna be material. Just surviving literally would be material given the way the stock is priced.
How long is it going to take to get to that $100 million run rate? You know, as I said, I just think that your shareholders, you can see it, no one cares. If you can't get people to care, then you've got to just say, "Fine, we'll sell this business, and we'll let you move on." How long is it going to take to get to that, you know, your $100 million target?
You know, I don't want to give a period of time. You know, we talked about a five-year period before. Obviously, we've eaten into that. You know, some things happened in the marketplace. It's, you know, it's not gonna be, you know, next year, and it's probably not gonna be the year after. but it's certainly very attainable, we still believe. And I think as we get to these higher levels, you know, things start to build upon themselves, and I think you see the growth start to compound a bit as we're able to layer on some of this additional activity. I know that doesn't answer you specifically, but.
No, I think we're at that stage where, and you know it, you see it, we need action. In lieu of action, what we really need is insider support, and we need to get the company to where we can get the, you know, the preferred dividends paid. You can be moving forward off of that, and we can return the value to the equity. As Tyson's implying, I think if we shut this company down today, I think that the preferred holders would get paid, you know, book value, and I think that the equity holders would make, you know, would make multiple bags on what was left. You know, let's get it there. I think that, you know, you can't expect your holders to have patience, I think you need to execute.
If you're the people you're working with, you're an important provider to them. You have skills, and you have capabilities and technologies that no one else has. That's very valuable. They're not gonna let you fail, but they need to do more than just keep you alive. They need to let you prosper.
Understood. Thanks.
Okay.
Appreciate it.
Thank you.
Bet.
Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. Capps for any final comments.
Yeah. I'd like to thank everyone for joining us this morning, and we look forward to talking to you again after our Q4. Thanks very much.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.