MIND - NASDAQ

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. [Operator Instructions] 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 a 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 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 to serve as a stimulant for much of our business. We believe that the sustained higher global energy prices are positive development for marine seismic (ph) contractors. On the other side of that coin, the higher energy prices have caused others to pursue investments in renewable energy, particularly the offshore wind farms. And this is a positive development for our marine survey business. Maybe more importantly, the global geopolitical and security situation and 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. 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, 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 defer from the quarter due to customer delivery constraints. It remains important to note that issues such as these are issues 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 were pursuing in this fiscal year. Although, we're pleased with this book of business and the traction that our product lines continue to achieve, whereby no means content. We are continuing to pursue other opportunities and are confident we'll be successful on 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 certain steps to control cost. 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 a 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. Mark?

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 cost and 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, 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 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 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 $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. Also our cost structure remains lean and flexible. Such as 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 in the orders that we secured to date, as well as with the robust interest in customer optimism that are reflected by our quotes and inquiries. As a result, we are confident that we are well positioned to meaningfully increased 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. [Operator Instructions] 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'd be South America or otherwise. Just kind of you 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 attitude optimism on the marine side. Actually, the European geophysical conference is going on in Madrid actually just wrapping up as we speak, and the tone there, it's been reported to me is pretty positive and there is a couple of announcements from some of our customers as far as new work, new contracts. So I think they're seeing a lot more optimism -- talking about bringing out additional vessels in 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 I think the Marine is offsetting the land side. There is some environmental issues that impact that, just the size, the projects and therefore the return on the marine side is a factor of that. But there is no doubt things are going in the right direction and we're seeing a lot more activity and that's 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, the defense starts to pick up to that and make it a little bit 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 is some specific projects would rather not prefer to. 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 of 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 this activities, these activities, given or the products are going and what the -- and these are primarily sonar products used for Mine Counter Measure and looking for other stuff under the water. 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 and defense budgets throughout Europe. UK, Finland, Sweden, Germany so that is driving, I think longer-term activity and is something that I think as you said a real good tailwind. And I think another important thing to point out here is, even if the conflict in Ukraine were resolved tomorrow. I think this really highlights the security issues that exist, not only in Europe, but also in Asia for that matter. So I think this definitely has been a bit of a sea change, if you pardon the pun. So I think it's good for us and unfortunately, or fortunately has been on your viewpoint.

Okay. So between -- since 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 also seeing internally, obviously, we got supply issues delivery all those things 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, so you do the math, we did $9 million in the first quarter, we're sitting on 20 book of business of $23 million. So that's 32 right there. And there -- as you say, there is other stuff that's going to come in. That's not part of our call, our book of business kind of recurring book and build stuff. So I mean, yeah, I think we are approaching that now. As you point out, there are supply chain issues, there are 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, some of the non-reoccurring. I guess, 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, very similar to Q1, but just better metrics on the margin side.

Well, I'd say it's certainly, we would see better metrics from a cost standpoint, from a top side standpoint, I just would caution that there is 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 if we can manage these new orders that are already surpassing what we had last year as far as what you did on total revenue your cash flow situation. Very light, you mentioned you 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 we 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 things changing 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 stuff. And frankly, no liquidate some of the receivables and some of the working capital that we can sit in on, because remember, we invested in working capital at the end of last year, early this year due to the supply chain issue. So if we can kind of maintain that same level, then I think we'll see some of that benefit come back to us from a liquidity standpoint. Yeah. Things get tougher, we have to get more aggressive then that could change things.

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 what you answered to Tyson that you expect to be able to build on this going forward. And you guys were, -- with Tyson, you were talking about and where you sit on the income statement 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, if you just compare the last couple of quarters are around 60%, maybe a little bit better than that. 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 good into 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 into 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 in the U.S. has been largely kind of 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 a 100% with your comment about those has been left to the Dutch. I think it's been an important thing 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 we're trying to wait -- the world is trying to address these issues. Again you can unmanned the vessels to a large degree, I think still trying to deploy those sort of solution. So I think that's what we see is increasing the market rather than trying to do this off named platforms, you are trying to develop unmanned or minimally manned platforms. So 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 in -- it's more in the forefront of people.

So, is the Navy's focusing down on it unmanned platform to -- they've been -- they've talked a couple of side that were in early development stage. Is that, do you see that as a positive in pushing up them forward faster?

Well, I think so. Yeah. Not sure do.

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

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

And away from that towards the industrial side -- and undersea, 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 immaterial that seems 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 got -- so 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, your fiscal 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 $1 million (ph) to $400 million run rate, where the math tells us we'd be pretty positive on an EBITDA basis [Multiple Speakers].

It can be real positive at that point. Ross, that's a tough question, obviously, 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 make as much progress as we all had hoped, but I don't think that changes where we see the overall opportunity. And so, you know, 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, there is -- the last couple of years have been, we didn't achieve as much we have as want to for obvious reasons for the pandemic reasons. So I think we're far down the road we were, when we started, but maybe it's not five-years from two-years ago and maybe it's something with the 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 it's still there.

Yeah, I think it's great. As I said good luck getting and if you can get these breakeven level by the -- on a run rate by the end of this year. I think that would be viewed because that would start to show the business being viable without the worry about needing to raise outside capital as it was for something exceptionally additive, perhaps in the way of an acquisition company.

Yeah.

Good job. Keep it up.

Okay. Thanks, Ross.

Thank you. Take care.

Next question is a follow-up from the line of Tyson Bauer with KC Capital. Please proceed with your questions.

Yeah. It’s couple of quick follow-ups. You talked about, was it auto recognition are you targeting? Is that sort of something unique that you guys are capable of doing for countermine intelligence? I haven't heard you mentioned that a whole lot in the past, is that something new?

Yeah. Something we actually announced earlier this year. So ATR, automatic target recognition is not unique to us. There are other ATR solutions out there. What is unique, we think is that our ATR solution has been optimized for our products or some of our products specifically and so that is very unique. So we think we have a tool there, which makes us very competitive -- much more competitive with others in the marketplace and bring some capabilities to the market that no one else can, again because they are optimized to our systems specifically, which is a really important part.

And is that been a determinant as far as winning some of these new orders or some of the activity you're seeing in the defense side?

I think it's -- I can't say, any orders we have in hand related specifically to that, but I can tell you for certain that the activity in the interest foreseeing is being spurred by that capability.

With your European JV partner, do you have product that is currently in use that is out of the trial phase, that is -- and are you receiving funds from that partner for the development and production of prototypes or the product commercially used?

So the -- it is not commercially deployed at this point and I'd rather than I talk about the specifics of the commercial arrangement that I can say it's not material at this point.

Do you anticipate by far the end of the year will be?

Yes, we think will be revenue streams by them.

Okay. And that's part of your anticipation of getting toward that $12 million a quarter situation and why you have that confidence?

Correct.

Okay. You mentioned Asia, are you specifically suggesting that this is targeted more towards Taiwan around Korea those areas or is a more general than that or are you seeing specific interest in where the placement of your product is going?

Well, I guess in this context is more general, but I mean read the paper. It's pretty obvious for the tensions in Asia are coming from and that's true in the U.S., China or Taiwan and China but Australia, Philippines. So there's definitely interest around that part of the world for these sort of things.

Is that also where they're trying to find more of these rare earth metals and that is more around the Asian continent?

It's not limited to that.

Okay. All right. Thank you. Keep it up.

You bet.

Thank you. That concludes our question-and-answer session. And I'd like to turn the floor back to Rob Capps for closing comments.

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.