Earnings Call: Q2 2022

Sep 9, 2021

Greetings, and welcome to the Mine Technologies Second Quarter 2022 Fiscal Year Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ken Dennard. Thank you, operator. Good morning, and welcome to the Mine Technology fiscal 2022 Q2 conference call. We appreciate all of you joining us today. Your hosts are Rob Katz and Guy Malden. Before I turn the call over to management, I have a few items to cover. If you'd 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 mine technology.com or a recorded instant replay until September 16. Information on how to access the replays were provided in yesterday's earnings release. Information reported on this call speaks only as of today, Thursday, September 9, 2021. And therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. And 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 these 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 ks for the year ended January 31, 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 with that behind me, I'd like turn the call over to Rob Capps. Rob? Okay, Ken, thanks. So I'd like to make some overall comments regarding our progress before Guy provides a bit more color and some detail. Although the general business and operating environment remains challenging, we continue to make progress towards our longer term growth goals. We saw a significant increase in revenues over the Q1, a trend we think will continue to the second half of the year. We believe there's a clear trend of increasing inquiries and order activity across most of our markets. We continue to make good progress on our strategic to address trends in the marine technology market. Progress on the disposal of assets from our legacy leasing business continues with a recent agreement for the sale of a significant portion of the remaining assets. So with that, now I'd like to hand things over to Guy to provide some more detail. I'll then come back in a bit with the financial results and address our general market outlook. Guy? Thanks, Rob, and good morning, everyone. The Q2 of fiscal 2022 was characterized by noticeable improvement over Q1. Although most of the challenges that we experienced During the Q1 remain intact and impacted our results to varying degrees, namely the continuing turbulence due to an over Stretched supply chain as well as the negative impact of the COVID delta variant continues to limit our ability to travel to many customer sites. The limitation is particularly pronounced in Asia Pacific. Looking at our 2nd quarter results, Revenues were up on a year over year basis with consolidated revenues up by nearly 34%. On a sequential basis, Consolidated revenues were up 62%. Our backlog remains roughly even with Q1 at 11,700,000 And this is inclusive of the $4,100,000 in CMAP orders announced in July, which we expect to be delivered in the second half of the fiscal year. We are quite encouraged by a recent uptick in inquiries and order activity across many market segments. In the marine exploration market, Demand for our source controller and positioning products remain robust. We are pursuing a couple of significant opportunities here, including one related to a new build vessel. With our strong market position, we are quite optimistic about these prospects. In the marine survey space, we have also seen improved order and inquiry activity for our single beam and multi beam side scan sonar systems. And activity within the defense or maritime security market also appears to be rebounding. We are Multiple opportunities for our multi beam sonar system for MCM applications. Additionally, Response to our AUV Mako system has been very encouraging. Now you will recall that this is a sonar system with multiple capabilities designed specifically for unmanned underwater vehicles. To be sure, plenty of challenges remain. As we mentioned during our prior call, the global supply chain disruptions continue to be a challenge. Specifically, Bottlenecks worldwide have contributed to a shortage of some components and materials, a surge in freight charges and prolonged shipping delays. While these issues did not have a strong direct impact in Q2, we are beginning to see the impact from these delays in select product areas. We are working aggressively to mitigate any related impacts. Despite the challenges, we believe the broader trend is one of improving markets and expect improved performance in the second half of the fiscal year as we complete scheduled orders and add new ones. We are also progressing well on our strategic initiatives. Despite some supply chain related challenges, We remain on track with development of our synthetic aperture sonar system in cooperation with our European defense contractor partner and expect first deliveries later this year. We are making good progress with our passive sonar systems for ASW and maritime security applications, which are based on our commercially developed SeaLink product line. We have deployed prototype systems and are hopeful of further traction going into next year. As I mentioned earlier, reaction to our sonar systems designed specifically for unmanned vehicles has been good. We continue to expand the capabilities of these systems in order to better meet the evolving requirements of our customers. We believe these actions will enable us to achieve our long term goal of reaching annual revenues of $140,000,000 in the next 5 years with an EBITDA margin in excess of 20%. With that, let me now turn the call back over to Rob. Okay. Thanks, Guy. Let me begin again by giving a detailed review of the 2nd quarter financial results before I make a few summarizing comments. Revenues from continuing operations totaled $6,800,000 in the quarter, which was up 62% sequentially versus $4,200,000 in the Q1 of fiscal 2022. When compared with our year ago revenues, this was an increase of 34%. 2nd quarter gross profit from continuing operations was $2,200,000 up from $543,000 in Q1. This represents a gross profit margin of 33%, which was also up from the 13% we achieved in the prior quarter. The increase reflects a positive impact of operating leverage as higher activity and revenues drove profitability gains. Our general and administrative expenses were $3,300,000 for the Q2 of fiscal 2022, which was down from $3,800,000 in the Q1 due to some normal seasonal fluctuations and our ongoing cost control efforts. Research and development expense was about $888,000 which was roughly flat with the Q1. These costs reflect activity on our strategic initiatives such as synthetic aperture sonars, passive sonar arrays and sensor systems for unmanned platforms as well as enhancements to other solar systems. Our loss from continuing operations for the Q2 of this year was $2,700,000 as compared to a $3,700,000 loss in the Q1 of fiscal 2022. Our 2nd quarter adjusted EBITDA We have the remnants of our legacy land leasing business classified as discontinued operations. After the end of the quarter, we entered into an agreement for the sale of This transaction will provide us with more than $4,000,000 of additional liquidity. We will continue to monetize the remaining assets, which consists of miscellaneous equipment and certain accounts receivable. Mine's capital structure and liquidity remains solid. At the end of the quarter, we had about $16,000,000 of working capital that included cash and cash equivalents of over $2,000,000 We have no funded debt, and our cost structure remains lean and flexible. So if challenges persist for longer than anticipated, we remain in a good position to persevere. And with the proceeds expected from the sale of our land leasing assets, We believe we have the resources necessary to soldier on through the challenges and take advantage of opportunities that may present themselves. And despite the challenges we've outlined that are still impacting the global marine market, we continue to hold a view that the second half of the fiscal year will be an improvement over the first half. Overall, our 2nd quarter showed a notable sequential improvement despite all the market volatility. In all conditions are far from ideal, we're encouraged by the ramp in business activity and we'll work through the challenges as the recovery gains momentum. We remain firmly convinced as to the soundness of our strategy and believe we are well on our way to begin our long term goals. That concludes our formal comments. At this time, we'll open things up for your questions. Operator? Thank you. We will now be conducting a question and answer session. Our first question is from Tyson Bauer with KC Capital. Please proceed. Good morning, gentlemen. Good morning. Hey, Tyson. Just a couple of quick housekeeping questions. First, Given the current backlog and your expectation that it will be delivered in whole in second half of this year, What is the delivery schedule looking if you're forecasting a better second half than the first half? That must imply some pretty good order intake to fill in what you work off in Q3? I mean, that's right. We do expect additional orders. And remember, our book to bill varies based on what the product is. It can be as quick as a week Or as long as 6 months for very large systems. So there is things that come in and go out during the quarter or during any period. Though there are some Fairly significant orders, as I indicated, that we are expecting. Okay. And your backlog composition, Was that primarily full systems or is it partial parts that you know are coming up? Just give us an idea what that competition is right now? It's all of the above. So there are full systems, both Seismic as well as sonar systems. There are parts orders. There are bits and pieces, so it's all of the above. Okay. And then the Q2 revenue, how much of that was just your I hate the word normal, but parts Services and stuff that you have reoccurring each quarter. I'll have the number in front of me, but it's going to be Half anyway is going to be that sort of stuff. It's kind of aftermarket, what we call aftermarket. Okay. So when we go forward You said there's quick turns. We're looking at $3,000,000 to $4,000,000 a quarter basically that's more or less reoccurring in parts services those things that Don't necessarily go into backlog, but have historically been present to each and every quarter. Yes. And I think the way I would say it is things that have quick turn that are quick book to build and so May not be in a backlog at the beginning of the period, but they certainly get booked and shipped during the period. Okay. Okay. Is it fair to say that $11,000,000 plus in backlog, you could have an additional $6,000,000 plus that's Your normal reoccurring aspect that would be above and beyond. So we're really looking at $17,000,000 spread across the 2 quarters. Yes. I don't want to get into specifics other than we do see certainly improvement from the Q2. Exactly when things get shipped is a bit of an uncertainty sometimes, especially in this environment, but we are confident that over The back half of the year, we'll get all the stuff out and stuff on top of that. Okay. So Q3 better than Q2, Q4 better than Q3? Yes. Okay. That's better than the first half. Trade show schedule Coming up, the big one in the U. K. Is that one we have the official coming out party with yourselves and your European partner? Not necessarily. So even though you have deliveries before the end of the year, it's still Kind of under avail? At this point, correct. Okay. Is that by their wishes? I think it's our mutual agreement. Okay. That's what you're On the cash flow statement, the PPP, What you had in the Q1 also the $850,000 is that the portion which is roughly what half That was fully forgiven and the rest has to be repaid? Or is it still the portion that is waiting for Classification whether or not it will be fully forgiven or not? No, that's all been fully forgiven. There was half was forgiven last year and half in the Q1. Okay. Cash sources, cash management, obviously, we have the at the end of the first quarter assets held Sale was $3,300,000 You sold a significant portion for over $4,000,000 Looks like we'll have a gain then in Q3. What is left? And does that math work out? We'll have roughly $700,000 or greater gain in the 3rd quarter? Yes. The accounting the GAAP accounting on that is a bit tricky because of some tax and some deferred Currency adjustments that go into that calculation. So I think I want to speculate on what a gain or loss might be on that. The remaining assets that we have some equipment remaining, some different types of equipment that remain We're continuing to pursue, not the same magnitude as the thing the transaction we just completed. We have some receivables that we'll continue to collect under some extended terms. Do you have an approximate valuation on what you think that market value is as far as being a future source of cash? Well, I just say that it's not to the same magnitude of the transaction we just completed or we just announced, But it's still fairly significant. Okay. And given that your outlook on the financial operations, You are comfortable that even if you did get large orders and had a need for working capital, you have the liquidity and flexibility in place to be able to accomplish and deliver on those orders? That's a big question. I think it depends. We are confident we can operate and we can execute on what we see coming. If circumstances change, Tyson, that's Something we'll have to react to. The supply chain issues are something that's evolving, And that could require us to be a little more aggressive on working capital, but we're confident we can have access to The funds and the resources to take care of them. Okay. And so the canceled order from Q1 come back in this quarter? Or is that still something that is Still out there potentially to come into your backlog? It's still out there. Yes, that's future. Okay. So that's another opportunity that exists that maybe on incremental to what you're seeing currently? Yes. Unlikely, we'd see that delivered in this year though, given where we are in the calendar. Okay. So it's Technically, it canceled, but yes, you're still eyeballing it as something that will occur and be delivered. Yes. I mean, that customer continues to be a customer, continues to And so, I mean, that requirement may look a bit different, but we're confident it's going to come back at some point. Okay. And last question or comment for me, not significant, but the meaningful insider buying during the quarter, Was that a concerted effort together to send the market a statement? Just say What you're seeing, you felt that you're comfortable with, obviously, can only speak for your own purchases and not the others. But what was the mindset there that all of a sudden we saw a group or you started to do insider buying? I think we all, speaking for myself and I think I can speak for others, we all are confident that we're again on the right track and saw an opportunity and had some liquidity personally and we're able to take advantage of it. So we believe what we're doing. Definitely believe that. That sounds great. And Guy, if this is your last call, it's been a pleasure working with you and talking to you through the years. Thanks, Tyson. I'm not sure I might have one more in me, but appreciate it. And it's I'm looking forward to the Certainly next chapter in my life, post retirement. Thanks a lot, gentlemen. Okay. You bet, Tyson. Thank you. Our next question is from Ross Taylor with ARS Investment Partners. Please proceed. Thank you. Gentlemen, obviously, behind Tyson, there are very few questions left unanswered. But Could you give us a little bit of color on the potential market size or the project size that you have bids out for right now, Both commercial and securitydefense. And also can you talk about has there been any drag or Negative impact from the fact that the U. S. Still does not have a budget at this point in time. So as a result, In many parts of the government are working on debt reduction by financing. Has that been an issue for you guys? Yes. I think overall government budget issues have not been a big factor for us, kind of where given where we are In the scheme of things, we're not Lockheed Martin, so it's not as important for us from a macro standpoint. As far as size of projects, I mean, gosh, Ross, they're all over the board. I mean, I'm reluctant to Be too specific there for obvious reasons, but we have a few $100,000 projects to a few $1,000,000 Projects that we're pursuing. So it's kind of all across the board. And it can be one project can be a series of orders of varying sizes as well. So if you look at your bids outstanding at this point in time, do you have an aggregate amount that you Currently are in the process of trying to secure? We do. That's not something I'd like to share at this point. But yes, most definitely, it's something we track On a regular basis. Is it a number that's big enough that if you realize If you win at your standard or slightly improved rate that you can get the free cash flow breakeven inside? Well, can you do that in 12 months? I mean, we've looked at you guys getting there, there's been a bunch of things. So you can? Yes, we can. The answer is yes. Okay. I appreciate that. I think that obviously getting to that point would be a huge positive. Yes, I understand that completely. Okay, cool. Well, thank you very much and I'll pass back in case Tyson wants to come back in and ask any more detailed questions. Okay, Ross. Thanks, man. Thanks. Take care. Thank you. This concludes today's question and answer session. I would like to turn the call back to management for any closing remarks. Okay. I'd just like to thank everyone for joining us today and for your interest in Mynd. I look forward to talking to you again at the conclusion of our Q3. Thanks very much. This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation and have a great day.