MIND Technology, Inc. (MIND) Q1 2022 Earnings Report, Transcript and Summary

Greetings and welcome to the MIND Technologies First Quarter Fiscal 2022 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you, Ken. You may now begin.

Thank you, operator. Good morning, everyone and welcome to the MIND Technology fiscal 2022 first quarter conference call. We appreciate all of you joining us today. Your hosts are Rob Capps, Co-Chief Executive Officer and Chief Financial Officer; and Guy Malden, Co-Chief Executive Officer and Executive Vice President of Marine Systems. Before I turn the call over to management of the normal housekeeping details to run through, if you’d like to listen to the 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 that’s at mind-technology.com or there will be a recorded instant replay feature until June 10. Information on how to access the replay features was provided in yesterday’s earnings release. Also information reported on this call speaks only as of today, Thursday, June 3, 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. 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 refer to the statement regarding forward-looking statements incorporated in the press release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements. Now, I would like to turn the call over to Guy Malden. Guy?

Thanks, Ken and good morning everyone. We would like to thank you for joining us today for our fiscal 2022 first quarter conference call. I will begin by making some general comments about the first quarter. Then I will hand the call over to Rob to discuss our financial results and address our general market outlook. The first quarter of fiscal 2022 was marked by some turbulence as both we and our customers began to experience some supply chain disruptions. Despite the rapidly improving COVID-19 situation in the United States, some parts of the world, particularly Asia, continue to experience associated disruptions and difficulties. While the recovery in global economy is clearly supportive of our long-term goals for the company, we can expect some bumps along the road. For instance, the global supply chain challenges I just mentioned can and have had an effect on our customer spending plans. We all have experienced increasing lead times and shipping times for some components and subsystems, which have in turn caused some delays in orders and deliveries. When we were planning our production schedule for the current year, we were able to get the pipeline flowing for certain key items such as PCBs and various other components. However, with so much activity getting underway simultaneously around the world, we are seeing some disruption to our supply chain. We think these situations are temporary, but they do insert an element of risk to our business, particularly with regard to the specific timing of activity. Another macro factor that has continued to weigh on our business is the lingering impact of COVID overseas. Specifically, some countries, particularly in the Asia-Pacific region, are still dealing with restrictions on business activity and access to outsiders. This has had an impact on our operations in Singapore and Malaysia. Like the global supply chain disruption, we believe this issue will also mitigate over time as vaccinations increase worldwide, but it does present a near-term challenge for us. Nonetheless, we saw some activity shift to the right during the quarter due to these issues in a variety of other reasons. Now, looking at our first quarter results, revenues were up on a year-over-year basis, with consolidated revenues up by nearly 32%. On a sequential basis, consolidated revenues were down 35%. Our backlog remains strong at $11.1 million, although down from the record $14.2 million we had at the end of Q4. Now that said, as mentioned in our press release, we are expecting to add a couple of fairly significant orders in the coming weeks, but overall, the supply chain and component shortages, combined with some orders being delayed to later this year, have temporarily hampered our visibility into near-term conditions. Despite challenging conditions, our long-term objectives remain intact. That is, we will capitalize on the explosive growth of the USP and AUV markets by offering comprehensive sensor payloads for these applications. We will address the growing market demand for higher resolution underwater images using synthetic aperture sonar and we will meet the need for cost effective anti-submarine warfare and maritime security solutions. By successfully addressing these needs, we believe we will attain our long-term goal of achieving 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 over to Rob.

Okay. Thanks, Guy. I will begin by giving you a detailed review of the first quarter financial results before I make a few summarizing comments. Now, keep in mind that our continuing operations are composed entirely of our marine technology products and that our legacy leasing operations are classified as discontinued operations. As Guy mentioned, the first quarter was impacted by the effects of customer orders being pushed to the right as well as supply chain disruptions, some of which are related to the lingering COVID impacts. Accordingly, our results were a bit less than we had planned. Revenues from continuing operations totaled $4.2 million in the quarter, which was down 35% sequentially versus $6.4 million in the fourth quarter of fiscal 2021. First quarter gross profit from continuing operations was $543,000, down from $2.5 million in Q4. This represents a gross profit margin of 13%, which was down from the 40% we achieved in the prior quarter. The decrease reflects the effect of unabsorbed production overhead due to the lower activity level. Our general and administrative expenses were $3.8 million for the first quarter of fiscal 2022, which is roughly flat sequentially. Our research and development expense was $1 million, which was up 9% from the fourth quarter of last year. The increase was largely due to higher levels of activity targeting the pursuit of our strategic initiatives, such as synthetic aperture sonar, passive sonar arrays and sensor systems for unman platforms. Our loss from continuing operations for the first quarter of this year was $3.7 million as compared to $3.3 million in the fourth quarter of last year. Our first quarter adjusted EBITDA from continuing operations was a loss of $3 million compared to a loss of $1.8 million in Q4 of last year. We are continuing to progress on the disposal of the land leasing business. These assets are carried on our balance sheet at approximately $4 million as of April 30, 2021. We continue to pursue a number of different avenues to monetize these assets. MIND’s capital structure and liquidity remained solid. At the end of the quarter, we had about $15 million of working that included cash and cash equivalents of over $2 million. As of today, we have no funded debt and have a lean and flexible cost structure, combined with the incremental proceeds from the continuing sales of our land leasing asset, we believe we have the resources necessary to overcome any challenges that the current environment may bring and to also fully take the opportunities as they become available. Despite COVID and supply chain issues, we continue to see a healthy level of inquiries and request for quotes. Although some orders have been delayed or revised or revised, there remains a steady demand for marine technology, particularly for our source controllers and related upgrades. As Guy mentioned, our backlog amounted to $11.1 million, which is down from the all-time high of $14.2 million set last quarter. We did have one order for approximately $2.1 million canceled during the quarter and, therefore, removed from our backlog. The requirements for this customer changed, necessitating the cancellation of this particular order. However, we do expect to receive other words from this customer as the requirements become better defined. As Guy mentioned, we also expect two relatively significant orders in the coming weeks, totaling more than $5 million. The supply chain issues and COVID overhang we’ve discussed introduced an element of risk and uncertainty to our near-term outlook. The shortfall we experienced in the first quarter may be difficult to make up during the balance of the year. However, the run rates we anticipated later in the year still look to be quite sustainable. In the long run, our enthusiasm remains unchanged and remains fully committed to our long-term objectives. Our past performance during times of adversity has shown that we can manage the downside impacts by focusing on execution and cost containment. As we’ve emphasized before, we stand ready to make further adjustments to both our operations and cost structure in the event of continued volatility. With no debt and the pending sales of our remaining lease bill equipment, we have the necessary breathing room needed to overcome the near-term challenges and if needed, to excess capital markets in the future. So in closing, although the first quarter turned out to be a bit more difficult than we’d anticipated, we remain excited about the future of bond technology and are firmly committed to executing our growth plan. Now that concludes our formal comments. At this time, we will open the line for questions.

Thank you. [Operator Instructions] First question is from the line of Tyson Bauer with KC Capital. Please proceed with your questions.

Good morning gentlemen.

Good morning, Tyson.

Comments regarding the Q1 wouldn’t be able to be made up through the remainder of the year, but you still expect to be at the same run rate that you discussed in the prior conference call. What assumptions are in that to make that statement given the supply chain disruption, COVID easing in Asia, other things that you’ve mentioned and the cancellation of that 2.1? Are you still anticipating that, that was a one-off situation, and we still are on track with other orders within the backlog and orders you expect to get with deliveries? Just give us a little color between those comments you made.

Sure. Sure, Bauer – Tyson. So the canceled order, we do expect those – that to be replaced effectively with other orders from that same customer. Again, they had a change in circumstance. So they just need something different. And they are trying to figure out what that difference is. So that’s kind of that situation. As far as making up the shortfall, I think the point we’re trying to make is there is a bit of a shift here. I didn’t want to give the impression that, okay, there was one order that we have moved to the next quarter. So it’s going to be – next quarter is going that much bigger just because of that. There is some assumption that there will be some continuing impact from the supply chain situation, which we think will mitigate later in the year. So that’s the reason we made the comment about not making up the shortfall, but still feel good about the run rates in the balance of the year based on the backlog, the scheduled deliveries and just the order flow in general. So I think we feel pretty good about all of that.

What were your deliveries in the quarter? And what do you expect in the second quarter?

I mean we did revenues of $4.2 million. We expect something more than that in the fourth quarter and the second quarter. I don’t want to give specific guidance on that.

Okay. I was just wondering if there was a system that because of third-party add-ons that you mentioned in the press release, that now gets delivered in Q2. So all of a sudden, we’re picking up an extra $1 million, $2 million there. But overall, we are still cautious on the timeline.

Yes. I think there is – there definitely is some amount of order that got pushed from Q1 to Q2. But again, you have to assume there is going to be something in Q2 that gets to Q3 just because of the supply chain issues. Part of it is, a lot of our systems are integrated with other pieces of equipment. So, the customer can’t receive delivery of that other equipment. They don’t need our stuff until a later date. So, that’s part of the situation that was seen.

Is that more – what we have seen in the news, lot chip related or other factors that we should keep an eye on?

I think it’s a general supply chain thing. I mean you see chips in this news a lot. And I think we kept our arms around that pretty well from our particular situation. But you are just seeing general lead times being pushed out and delivery times pushed out shipping issues is part of the issue.

Yes. It’s not just supply. It is supply chain, but then it’s the shipping related to that supply chain. It’s sort of unprecedented from our perspective, the lengthening of shipping times.

Okay. You also commented no capital needs. You still got $4 million assets for sale that are on the balance sheet that hopefully finding a prospective buyer there. Does that imply then as we get into a more, hopefully, a routine or more normalized orders, building deliveries that you can handle everything internally with those source of funds and that cash management. We shouldn’t expect any other preferred or common ATM usage or any other extraordinary capital needs?

I think we feel like we can handle things internally as to whether or not we can utilize the capital markets, really depends on some of the opportunities we see for accelerating development activities or maybe some M&A activity. So, I don’t want to say we will – we won’t address the capital markets, but I think it will be more for expansion.

Okay. And last question. With your European partner, just discuss where you are in that time line with the product rollout, marketing, naming, just a little flavor on where you stand with your European partner?

We are in the middle of the project right now. It’s progressing on schedule...

On schedule.

Very much on schedule. Again, we expect first delivery later this year.

Has that been in any trade shows or anything in the – where that’s been…?

Not yet.

What do you expect the public coming out probably?

Later this year.

Yes. Starting late August, but later this year.

Thank you.

Thank you. Our next question comes from the line of Ross Taylor with ARS. Please proceed with your questions.

Thank you. It’s always difficult to follow Tyson because you tend to ask all selecting that one needs to ask. First on, you mentioned something about a $5 billion order coming later this year?

Actually, later this quarter, we think there is actually a couple of orders that total a bit over that, that we are I think are imminent.

Can you give us a little bit more color about those orders and even like what sectors or are they industrial corporate orders or are they government defense orders? A little bit more color about them?

These – but they are both, actually. Yes, one is governmental and one is commercial. And I really can’t see much more about that since they are still pending.

Okay. Well, I think, obviously, that’s pretty exciting. How are you seeing the bid environment going on? I am talking to people who deal with things like Washington are finding Washington seems to be really behind the curve on paperwork and things of that nature. How are you finding the domestic bid environment, that’s from the government as well as overseas and just generally the corporate environment?

Yes. I think from the governmental side, we don’t see things much different than having from normal, if you will. I mean it’s always cumbersome, and that hasn’t changed. I don’t think we have seen it slow down. I think what we have seen during the past year, a lot of government offices were closed, and you couldn’t go see people. And that’s starting to change. So, we actually have some face to face meetings scheduled in the near-term, which is – that’s a big change for us. I think on the commercial side, you are definitely seeing things pick up a bit, yes. No doubt about that.

Yes. No doubt.

I think Asia is a lagging event for the reasons Guy talked about, but we are definitely seeing things pick up a bit.

So, if you were to take away the supply shortage and the choke point, how do you think – what would you think your backlog business would be building. Do you think that’s – right now, we are seeing a major drag on the building of this backlog right in here because of the fact that people can’t get components and the like and people are a little up in…?

I don’t know if I would say that. I understand, Ross, our backlog can go up and down. A couple of big orders have a big impact on our backlog. So, that could be a bit dangerous to draw too many conclusions from that. There is an impact, but I wouldn’t say we are seeing a major impact. The people say, okay, I am not going to say delivery until next March. So, I don’t need to worry about placing the order. Maybe there is some of that. But to counter that, they have recognize the lead time issues, so the sooner they get an order on with us, the sooner we can get it into the production plan. So, that’s actually kind of countering some of the offset.

Okay. Well, it’s good. It’s great to hear that you think particularly if you can get the for-sale assets sold that you will not need to be revisiting the market on a regular basis. I think that would be a major plus and set the stage for going forward and you guys achieving the goals that you have laid out.

Okay. Thanks Ross.

Thank you, sir. Take care.

Thank you. At this time, I will turn the floor back to management for closing remarks.

Okay. Thanks, everyone, for joining us today. I appreciate your time. We look forward to talking to you in a few weeks, few months for our second quarter call. Thanks very much.

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may now disconnect your lines at this time, and have a wonderful day.