Greetings and welcome to the MIND Technologies’ Second Quarter 2022 Fiscal Year Conference Call. [Operator Instructions] 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 MIND Technology fiscal 2022 second quarter conference call. We appreciate all of you joining us today. Your hosts are Rob Capps and Guy Malden. Before I turn the call over to management, 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 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 are 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-K 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 would like to turn the call over to Rob Capps.

Rob?.

Okay, Ken. Thanks. So, I would like to make some overall comments regarding our progress before Guy provides a bit more color in some detail. Although the general business and operating environment remains challenging, we continue to make progress towards our longer term growth goals.

We saw significant increase in revenues over the first quarter, a trend we think will continue to the second half of the year. We believe there is a clear trend as increasing inquiries and order activity across most of our markets. We continue to make good progress on our strategic initiatives 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 would like to hand things over to Guy to provide some more detail. I will then come back in a bit with the financial results and address our general market outlook.

Guy?.

Thanks, Rob and good morning, everyone. The second quarter of fiscal 2022 was characterized by noticeable improvement over Q1 although most of the challenges that we experienced during the first quarter remain intact and impacted our results to varying degrees.

Namely, the continuing turbulence due to an overstretched 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 second 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 $11.7 million.

And this is inclusive of the $4.1 million in Seamap 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 in 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 newbuild 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 sidescan sonar systems. And activity within the defense for our maritime security market also appears to be rebounding. We are pursuing multiple opportunities for our multi-beam sonar system for MCM applications.

Additionally, response to our AUV-MAKO system has been very encouraging. 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 continued 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.

And we believe these actions will enable us to achieve our long-term goal of reaching annual revenues of $140 million 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 second quarter financial results before I make a few summarizing comments. Revenues from continuing operations totaled $6.8 million in the quarter, which was up 62% sequentially versus $4.2 million in the first quarter of fiscal 2022.

When compared with our year ago revenues, this was an increase of 34%. Second quarter gross profit from continuing operations was $2.2 million, 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 are $3.3 million for the second quarter of fiscal ‘22, which was down from $3.8 million in the first quarter 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 first quarter. These costs reflect activity on our strategic initiatives such as synthetic aperture sonar, passive sonar arrays, and sensor systems for unmanned platforms as well as enhancements to other sonar systems.

Our loss from continuing operations for the second quarter of this year was $2.7 million as compared to a $3.7 million loss in the first quarter of fiscal 2022. Our second quarter adjusted EBITDA from continuing operations was a loss of $1.8 million compared to a loss of $3 million in Q1.

As you know, 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 a significant portion of these assets. This transaction will provide us with more than $4 million of additional liquidity.

We will continue to monetize the remaining assets, which consists of this land lease equipment and certain accounts receivable. MIND’s capital structure and liquidity remains solid. At the end of the quarter, we had about $16 million of working capital that included cash and cash equivalents of over $2 million.

We have no funded debt and our cost structure remains lean and flexible, so challenges persist for longer than anticipated, we remained 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 have outlined that are still impacting the global growing 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 second quarter showed a notable sequential improvement despite all the market volatility and all conditions are far from ideal.

We are encouraged by the ramp in business activity and have worked through the challenges as 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. This time, we will open things up for your questions.

Operator?.

Thank you. [Operator Instructions] Our first question is from Tyson Bauer with KC Capital. Please proceed..

Good morning, gentlemen..

Hi, Tyson..

Just a couple of quick housekeeping questions first up given the current backlog and your expectation that it will be delivered in whole – in the second half of this year, what is the delivery schedule looking if you are 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 here we are, 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 periods though there are some fairly significant orders as Guy indicated that we are expecting..

Okay.

And your backlog composition is that primarily full systems or is it partial parts that you know are coming up, just give us an idea of 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 and it’s all of the above..

Okay.

And then the second quarter revenue, how much of that was just your, hate the word, normal, but parts and services and stuff that you have reoccurring each quarter?.

I don’t have the number in front of me, but it’s going to be half anyway, is going to be that sort of stuff kind of aftermarket – overhaul aftermarket..

Okay, so when we move forward….

There is split currency..

We are looking at $3 million to $4 million a quarter basically that’s more or less reoccurring in parts and services, those things that necessary – don’t necessarily go into backlog, but have historically been present each and every quarter..

Yes. And I guess the way I would say it is things that have quick turn that are quick book-to-bill 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. Is it fair to say that $11 million plus in backlog, you could have an additional $6 plus million that’s your normal reoccurring aspect that would be above and beyond.

So we are really looking at $17 million spread across the two quarters?.

Yes, I don’t want to give into specifics other than we do see certainly improvement from the second quarter. Exactly when things get shipped, it is bit of an uncertainty sometimes, especially in this environment that we are confident that over the back half of the year, we will get all the stuff out and stuff on top of that..

Okay, so Q3 better than Q2, Q4 better than Q3?.

Yes..

Okay..

Back half better than first half..

Trade show schedule coming up big one in the UK, 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.

On the cash flow statement, the PPP what you had in the first quarter also of $850,000? Is that the portion which is a roughly one-half, that was fully forgiven? And the rest has been repaid, or is it still the portion that is waiting for classification? Whether or not it will be fully forgiven or not?.

Now, that’s all been fully forgiven. That half was forgiven last year and half in the first quarter..

Okay.

Cash flow versus cash management, obviously, we have the, at the end of the first quarter assets held for sale was $3.3 million, you sold a significant portion for over $4 million, it looks like we will have a gain, then in Q3, what is left? And does that math work out, we will have roughly $700,000 or greater gain in the third quarter?.

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 don’t want to speculate on what a gain or a loss might be on that.

But the remaining assets, we have some equipment remaining, some different types of equipment that remain, that we are continuing to pursue. That’s the same magnitude as the thing. The transaction we just completed also had some receivables that will continue to collect under some extended terms..

Do you have an approximate valuation of what you think that market value is, as far as being a future source of cash?.

Well, yes, I would 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?.

It’s a good 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 will 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 that we are confident we can have access to the funds and the resources to take care of them..

Okay, did the cancel the order from Q1 come back in this quarter? 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 are seeing currently?.

Yes, and likely, we will see that in the lid delivered in this year though, given where we are in the calendar..

Okay, so it’s technically a canceled, but you are still eyeballing it as a something that will occur and be delivered?.

Yes, I mean, that customer continues to be a customer, continues to have needs. And so I mean, that requirement might look a bit different than work-off that is going to come back at some point..

Okay.

And last question or comment for me, significant or 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 are seeing you felt that you are comfortable with? Obviously, you 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 are again on the right track, and saw an opportunity and had some liquidity personally and we are able to take advantage of it. So, we believe what we are 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 am not sure I might have one more, but appreciate it. And it’s I am looking forward to the certainly next chapter in my life at 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 security/defense.

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, frankly, in many parts of the government looking at that solution by financing, has that been an issue for you Guy?.

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 are 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 are all over the board is reluctant to be too specific.

They are for obvious reasons that, we have a few $100,000 projects to a few $1 million projects that we are pursuing. So, it’s kind of all across the board. And it’s going to be one project to 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 would like to share with 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, you can get the free cash flow breakeven in size?.

Absolutely..

Well, can you do that in 12 months? I mean, we have looked at….

Yes..

You guys getting there from 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 acute positive..

Understand that completely..

Okay, cool. Well, thank you very much. And I will pass back in case Tyson wants to come back in and ask any more..

Okay, Ross. Thanks..

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 would just like to thank everyone for joining us today and for your interest in MIND. I look forward to talking to you again at the conclusion of our third quarter. 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..