Mind Technology, Inc Q1 FY2023 Earnings Call

Greetings. Welcome to the MIND Technology Fiscal 2023 First Quarter 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, Ken Dennard. Ken, you may now begin.

Thank you, operator. Good morning, everyone, and welcome to the MIND Technology fiscal 2023 first quarter 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 have some normal housekeeping details to run through. If you would like to listen to a replay of today’s call, it will be available for 90 days via webcast going to the company’s Investor Relations section at mind-technology.com or via telephonic recorded instant replay until June 16. Information on how to access the replay was provided in yesterday’s earnings release. Information reported on this call speaks only as of today, Thursday, June 9, 2022, 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. 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 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, 2022. 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 to turn the call over to Rob Capps. Rob?

Okay. Thanks, Ken. So I'd like to begin by first making some observations on the market environment and our progress to date, before Mark discusses the financials in detail. I'll then wrap things up with some final remarks. As we've noted on recent calls, we've been pleased with the improvement that we're seeing in the underlying market conditions that surround our business. We think this uptick in customer interest is largely indicative of the general economic and geopolitical trends that serve as a stimulant for much of our business. We believe that the sustained higher global energy prices are a positive development for marine seismic contractors. On the other side of that coin, the higher energy prices have caused others to pursue investments in renewable energy, particularly in offshore wind farms. This is a positive development for our marine survey business. Maybe more importantly, the global geopolitical and security situation, not only in Europe but also the rest of the world, has highlighted the need for maritime security technology. Some of our recent and pending orders are a direct result of this. These macroeconomic trends and increasing levels of activity are evidence that the effects of the global pandemic are abating. This increases our optimism that we are well positioned to grow in the coming periods. The significant increase in revenue we saw this quarter is, we believe, a strong indication of the benefit of these trends. Looking at our first quarter results, consolidated revenues were over $9 million, which is up approximately $5.3 million, or 142% quarter-over-quarter. As I just said, we think this increase is an important milestone and an indication of things to come. As we discussed on our last call, approximately $2 million worth of orders were pushed from the fourth quarter and were delivered in this quarter. As you'll recall, these orders had been completed, but due to logistical challenges, our customers could not accept delivery and we could not recognize revenue. While the first quarter benefited from these items, we had a similar situation this quarter, with orders totaling approximately the same $2 million deferred from the quarter due to customer delivery constraints. It remains important to note that issues such as these are matters of timing not less opportunities. While it's not ideal, it's just the nature of the beast and these won't be the last challenges that we encounter. Our backlog as of April 30, 2022, was approximately $13.4 million. If you consider our backlog and other highly confident orders, which includes anticipated orders received after the end of the quarter and orders from RFQs that specify our products, our book of business totals approximately $23 million. We expect to deliver all of these orders as well as others that we're pursuing in this fiscal year. Although we're pleased with this book of business and the traction that our product lines continue to achieve, we're by no means content. We are continuing to pursue other opportunities and are confident we'll be successful in many. We're optimistic that this will be reflected by improving results in the coming periods. Our strategy to develop innovative technology and to find new applications for existing technology remains important. These activities include passive sonar arrays, automated target recognition, synthetic aperture sonars and systems for unmanned platforms. Our programs to bring these technologies and related products to market continue to progress. Our focus continues to be on operational excellence and on executing our business strategy to maximize our near-term results. As also mentioned in our last call, we've taken steps to control costs. Although we have not yet seen the impact of these actions, we think it will be seen in coming periods. We will concentrate our efforts in areas where we are seeing immediate demand and as the global backdrop continues its recovery, we will look to expand our capabilities to meet the growing needs of customers. And with that, let me turn things over to Mark and let him walk you through our first quarter results before I make a few summarizing comments.

Thanks, Rob, and good morning, everyone. As Rob mentioned earlier, revenues from continuing operations totaled $9.1 million in the quarter, a 117% increase when compared to the $4.2 million in the same period a year ago. Gross profit from continuing operations in the first quarter was $3.3 million, up over 500% when compared to the same period a year ago. This represents a gross profit margin of 36% for the quarter, which is up from the 13% we achieved during the prior-year quarter. The increased revenue for the quarter resulted in higher absorption of fixed costs and an improved gross profit margin. Our general and administrative expenses were $4.3 million for the first quarter fiscal 2023, which was up from $3.7 million in the fourth quarter. Our G&A expenses are typically higher in the first quarter of the year, as a result of employment-related taxes which are front-end loaded and higher professional fees associated with year-end reporting activities. In addition, we incurred higher travel and promotional costs, primarily related to trade shows, as pandemic-related restrictions have eased, and we re-engage with customers. Additionally, we incurred approximately $300,000 in non-recurring costs this quarter related to the cost reduction activities that Rob referred to. As we previously mentioned, we do expect further reductions in our general and administrative expenses in the coming quarters. Our research and development expense was about $1 million for the first quarter, which was roughly flat sequentially. Consistent with the prior period, these costs are largely directed toward our strategic initiatives such as automatic target recognition, synthetic aperture sonar, passive sonar arrays and sensor systems for unmanned platforms and our other strategic product initiatives. Our loss from continuing operations for the first quarter of this year was $2.1 million, as compared to a $5.1 million loss in the first quarter of fiscal 2022. Our first quarter adjusted EBITDA from continuing operations was a loss of $1.9 million compared to a loss of $3 million in the same period a year ago. For our legacy land leasing business, which is classified as discontinued operations, we realized approximately $300,000 in Q1 asset sales. We expect to complete the sale of all remaining assets related to discontinued operations in the coming months. MIND’s capital structure and liquidity remain good. As of April 30, 2022, we had working capital of approximately $16.7 million and cash of approximately $817,000. We collected approximately $4 million of accounts receivable in May, so our cash situation has improved significantly and we have good visibility on additional receivables that are imminent. We continue to have no funded debt or outstanding obligations. Our cost structure remains lean and flexible. If market conditions take a turn for the worse, we believe our largely variable cost structure gives us some leeway to reduce our expenses commensurate with any declines in our business. I'll now pass it back to Rob for some concluding comments.

Okay. Thanks, Mark. We're encouraged by the market improvement that we're seeing and the indications of recovery that are becoming more evident throughout our business. We're pleased with the improvement in results and the orders that we secured to date, as well as with the robust interest in customer optimism that is reflected by our quotes and inquiries. As a result, we are confident that we are well positioned to meaningfully increase revenue in the coming period, despite the inflationary pressures, supply chain challenges and macroeconomic uncertainty that persist. Our goal will always be to grow our book of business and position the company for long-term success and profitability. We feel that we have taken important steps towards achieving this goal in the first quarter, and we intend to carry this momentum throughout the remainder of the year. Supply chain and logistical challenges continue to surround our business, but we're confident in our ability to navigate the circumstances. We feel that we are very well positioned to capitalize on the opportunities that we're seeing in the market. Our ability to leverage our unique technologies to generate orders demonstrates these capabilities. I'm positive that our record of operational excellence along with our exceptional team of employees will enable us to drive meaningful shareholder value in the near term. With that, operator, we can now open the call up for some questions.

Thank you. Now we will be conducting a question-and-answer session. Our first question is from the line of Tyson Bauer with KC Capital. Please proceed with your question.

Good morning, gentlemen, and great quarter to start the year.

Thanks, Tyson.

I guess the best way to frame this, it looks like we're having some building tailwinds finally for the business, especially on the top line. Let's break down kind of the defense versus the marine exploration side of it. Seen a lot more activity as far as marine versus land, especially with oil the way it is and some of these developments that are going on, whether it be South America or otherwise. Just kind of give us a little sense of what you're seeing in that marketplace and why we are seeing the demand in the marine side versus the land that's really just kind of been stuck?

Yeah. You're right about that. We aren't seeing much activity on the land side, of course, that's not as important to us anymore, but definitely seen an uptick in activity and optimistic attitude on the marine side. Actually, the European geophysical conference is going on in Madrid, just wrapping up as we speak, and the tone there, it's been reported to me is pretty positive and there are a couple of announcements from some of our customers concerning new work, new contracts. So I think they're seeing a lot more optimism, talking about bringing out additional vessels in the coming months, which is encouraging. Now, of course, as you know, Tyson, we are coming from a lower level of activity versus 10 years ago, of course, but certainly, I think the reason the marine is offsetting the land side. There are some environmental issues that impact that. Just the size of the projects and therefore the return on the marine side is a factor, but there is no doubt that things are going in the right direction and we're seeing a lot more activity. Frankly, the increase in revenues we've seen to date is probably more directly related to the marine exploration side, but I'd say the order side on defense starts to pick up too, making it a little more equitable between the two of them.

Do you have a breakdown between exploration and defense in the backlog that you're willing to share?

I prefer not to share that because there are specific projects I would rather not disclose. So I'd rather not do that.

Okay. Let's talk about the defense, a lot of chatter going on with the Ukraine defense spending, port clearing for grain shipments, free-floating mines off the shore of Turkey in the Black Sea. What direct impacts are you seeing from that and what indirect impacts are you seeing that may accelerate some of these naval unmanned programs that you're doing here in the U.S. and also with your European partner?

Yes. So, as I said in our comments, we have definitely seen specific orders that are related to these activities, given the products are going toward mine countermeasure and looking for other items underwater. So there are specific orders that we're seeing that are related to that. On a more general side, as you alluded to, we're seeing significant increases in defense budgets throughout Europe, including the UK, Finland, Sweden, and Germany, so that is driving, I think, longer-term activity and serving as a real good tailwind. Importantly, even if the conflict in Ukraine were resolved tomorrow, I think this highlights the security issues that exist, not only in Europe but also in Asia for that matter. So I think this definitely represents a sea change, if you pardon the pun. It's good for us and, unfortunately or fortunately, that depends on your viewpoint.

Okay. So between January 31, my math is correct, you've done about $19 million, $20 million of new orders that you feel secured about. You did $9 million in the first quarter recognized revenue, another $23 that you expect to recognize. We add in what you typically get in parts and services per quarter; you're starting to push that $40 million mark. Whether we get there or not, but that's how the math works out. Is that something that you're seeing internally? Obviously, we've got supply issues and delivery challenges that throw a monkey wrench in that, but the way the numbers are working out, we're trending toward that $40 number for this year?

Well, I mean, if you do the math, we did $9 million in the first quarter, and we're sitting on a book of business of $23 million. So that's $32 million right there. As you say, there is other stuff that's going to come in that's not part of our book of business. So I mean, yeah, I think we are approaching that now. As you point out, there are supply chain issues, delivery issues, so who knows what might happen, but it's definitely trending in the right direction.

Okay. It would appear from your commentary that Q2 should look similar to Q1 or within that ballpark there, but with better profitability metrics as we start to see some of those cost savings and some of the non-reoccurring items taken out of there, and some of the improvements on your capacity utilization. Is that the right way to kind of view it, as Q2 similar to Q1, but just better metrics on the margin side?

Well, I'd say it's certainly that we would see better metrics from a cost standpoint and from a top-side standpoint. I just would caution that there are always the issues of timing of delivery and things like that. But again, the general trend is as you point out.

Okay. And the last one, obviously to recognize. If we get those top-line numbers and manage these new orders that are already surpassing what we had last year as far as total revenue, your cash flow situation looks very light. You mentioned you've got $4 million in accounts receivable as you are going to accelerate your growth, or that's the plan. Where do we get to the point where we're not behind the eight ball and can actually be in front of it to give us a little cushion? Where do you see that happening?

Sure, I mean, that’s a great question, Tyson. Obviously, capital is always an issue for us. Liquidity is something we have to watch carefully, given the environment that we are in. I don't see a need as I sit here today for additional capital right now, absent some opportunity or if things change in a dramatic way. So I think we'll start to ease out of the or improve that situation gradually as we're able to start delivering more and more of the products. And frankly, liquidate some of the receivables and some of the working capital that we can sit on. Remember, we invested in working capital at the end of last year and early this year due to the supply chain issues. So if we can maintain that same level, then I think we'll see some of that benefit come back to us from a liquidity standpoint.

All right. Thank you, gentlemen.

You bet.

The next question is from the line of Ross Taylor with ARS. Please proceed with your question.

Thank you. Once again, great quarter, gentlemen on the revenue side. It sounds like, based on what you answered to Tyson, that you expect to be able to build on this going forward. You guys were, with Tyson, you were talking about where you sit on the income statement and balance sheet side, more specifically when and what level of revenues do you think, right now it's going to take for us to get EBITDA positive, free cash flow positive and earnings per share positive?

Sure. I mean so, Ross, if you kind of do the math, the contribution margins, comparing the last couple of quarters are around 60%, maybe a little bit better. So incremental revenue brings marginal revenue or marginal EBITDA in that range. So if you do that math, you get to $11 million, $12 million a quarter. If you're able to get to that point.

Okay. So then, do you think you can get to that kind of quarterly run rate by the end of this fiscal or is it going to take until next fiscal year to get there?

I think we can get through this year.

Okay. That's great. Historically, NATO has left countermine warfare to the Dutch I believe, and the U.S. has largely been interested in it. My pick up on what you're saying is that you're starting to see, not just in Europe but also the United States, the greater realization that these nations need to have these capabilities themselves, which greatly expands the market, I would think, and what it had been previously. Is that something that you're actually seeing?

So I'm not sure I agree 100% with your comment about those responsibilities being left to the Dutch. I think it's been an important task for other NATO countries and for the U.S. alone. The Dutch do have some capabilities there. I think what we're seeing is the way nations are trying to address these issues. Again, you can unmanned the vessels to a large degree, and I think they're deploying those sorts of solutions. What we see is increasing the market rather than trying to deploy just named platforms; you are trying to develop unmanned or minimally manned platforms. I think that definitely increases the market for us. But frankly, I think more importantly, I think just the threat from this sort of thing is increasing and it's more in the forefront of people's minds.

So, is the Navy's focusing down on unmanned platforms? They've been talking about a couple that were in early development stages. Is that, do you see that as a positive in pushing them forward faster?

Well, I think so. Yeah. Not sure to what extent.

And in the past, the U.S. largely used helicopters just for mines; it sounds like they're going through a significant shift in how they approach mine warfare that works strongly to your advantage. I mean, are we literally entering a new age of this?

Yeah. I'm not sure I'd say it's dramatic. I think there are still a variety of platforms and techniques that are used. So I don't think they're abandoning any of the historical methods necessarily, but I think it certainly is expanding the opportunities for things that we have.

And away from that, towards the industrial side, are you seeing any interest—or is there interest for exploring undersea for a lot of the EV-related and green-related minerals that seem to be in such short supply on land?

Absolutely, and it's a lot of the research activity we're seeing. Some of the research institutes that are buying our equipment are doing just that sort of thing.

Okay. I mean it sounds like you’ve in the past talked about the ability to do, be a $100 million business. It looks like this year you could end the year with a run rate in the neighborhood of $44 million to $48 million or more. How long do you think it's going to take us to get to that $100 million to $400 million run rate, where the math tells us we'd be pretty positive on an EBITDA basis?

It can be really positive at that point. Ross, that's a tough question. Obviously, there are lots of factors involved as to how we get there. I think the last two years have been a challenge for obvious reasons, and so we did not make as much progress as we all had hoped. But I don't think that changes where we see the overall opportunity. We talked about a five-year plan before, and I think that's very doable.

Okay. So five-year plan from when you initially indicated you would get there?

Yeah, but I think, as I say, the last couple of years have been challenging. We didn't achieve as much as we wanted for obvious reasons due to the pandemic. So I think we're far down the road compared to when we started, but maybe it's not five years from two years ago, and maybe it's something shorter than that. But the point is, the opportunity is there, Ross, and whether it's two years, three years, or five years, I think the potential is still there.

Yeah, I think it's great. As I said, good luck getting breakeven by the end of this year. I think that would be viewed positively as that would start to show the business being viable without the worry about needing to raise outside capital unless it was for something exceptionally additive, perhaps in the way of an acquisition company.

Yeah.

Good job. Keep it up.

Okay. Thanks, Ross. Okay. Thanks everyone for joining us this morning. We look forward to talking to you again at the end of our second quarter. So thanks very much.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time and have a wonderful day.