MIND Technology, Inc. (MIND) Q4 2022 Earnings Report, Transcript and Summary

Greetings. And welcome to the MIND Technologies’ Fourth Quarter 2022 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, Mr. Zach Vaughan with Dennard Lascar Investor Relations. Thank you, Mr. Vaughan. Please go ahead.

Thank you, Operator. Good morning. And welcome to the MIND Technology fiscal 2022 fourth 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 the 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 via recorded instant replay until April 28th. 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, April 21, 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 it -- in 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, I’d like to turn the call over to Rob Capps. Rob?

Okay. Thanks, Zach. So I’d like to begin by making -- first making some observations on the market environment before Mark discusses the financials in detail. I’ll then wrap things up with some final remarks. Consistent with the past several quarters we continue to see increased levels of customer interest across nearly all of our markets. We think there are a couple of factors driving this. First, the drag of the global pandemic is abating. We’re able to travel and see customers and attain trade shows. As of earlier this month for the first time in two years, we can travel by land between our Singapore and Malaysia facilities. These are important developments. Secondly, the general trends within our primary markets are positive. With oil prices about $100 per barrel, the pricing environment within the energy industry is creating optimism and demand from our customers in that space. Events in Europe and the general global geopolitical situation highlight the need for maritime security technology and are driving demand for certain of our products. The move towards renewable energy sources, particularly offshore wind farms, is driving activity for our customers in the marine survey space. Our announcement of new orders last week, which we’ll talk more about in a bit, is good evidence of these trends and increased activity. Now looking at our full year results, consolidated revenues were up approximately $1.9 million year-over-year. However, our fourth quarter revenue was not what we expected. We had orders of both CMF and a client [ph] that had been completed, but due to logistical challenges our customers could accept delivery. We have certain other orders that we expected to complete and deliver in the quarter, but we are unable to do so due to supply chain issues. As disappointing as these results are, I think, it’s important to note that each of these issues are once a timing, not lost opportunities. To be sure, there will be other challenges in the future and we see that general level of activity increasing. Our backlog of orders as of January 31, 2022, was $13.1 million. But subsequent to our fiscal year end, we received firm orders of approximately $5.8 million and have responded to request for quotes or RFQs that specify our products of approximately $4.5 million. Therefore, our firm and highly competent orders today total approximately $23.5 million. This is the highest book of business since our transformation away from the legacy Equipment Leasing business and that’s not the end of it. We are pursuing other opportunities and are confident we will be successful on many. We are encouraged by the level of interest we are receiving from our customers and the engagement across our commercial and military market gives us optimism that we can translate further orders. Our strategy to develop innovative technology and find new applications for our existing technology remains intact. We recently introduced our Spectral AI automate -- automatic target recognition or ATR technology. This development has, in our opinion, been very well received by our customers and can differentiate our sonar products. Our synthetic aperture sonar or SAS development project is progressing. While initial deliveries have been delayed from our original expectations, due in large part to component supply issues, we continue to believe this will be an important contributor in the future. Applications for unmanned platform, this is another area of focus for us. We are entering in integrated sonar system for unmanned underwater vehicles that we call MAKO is an example of that. We also see our passive sonar arrays as an ideal application for unmanned surface vehicles. Now despite these visions for the future, we enter fiscal 2023 with a focus on near-term results. We are concentrating our efforts in areas where we see immediate demand, such as our multi-beam sonar systems, higher capability single-beam systems and seismic exploration systems. That being said, we continue looking to control cost in this challenging environment. Now, let -- I will let Mark walk you through our fourth quarter and full year financial results in more detail before I will make a few summarizing comments. Mark?

Thanks, Rob, and good morning, everyone. As Rob mentioned earlier, revenues from continuing operations totaled $3.8 million in the quarter, resulting in a decrease of about 41% versus the $6.4 million reported in the same period a year ago. This decrease is largely attributable to the supply chain, bottlenecks and delivery delays that Rob alluded to. Full year revenue amounted to $23.1 million, which was up 9% versus fiscal year 2021. Full year gross profit from continuing operations was approximately $6 million, down 17.6% when compared to the same period a year ago. This represents a gross profit margin of 26.1% for the year, which was down from the 34.5% we achieved during fiscal year 2021. The reduced margin is due mainly to revenue mix, but also reflects inefficiencies resulting from the supply chain disruptions and delivery delays noted in Rob’s opening comments. Our general and administrative expenses were $3.7 million for the fourth quarter of fiscal 2022, which was down from $3.9 million in the third quarter. We do expect further reductions in our general and administrative expenses, following Guy Malden’s retirement and the departure of Dennis Morris, our Chief Operating Officer. We do not intend to replace those positions. Our research and development expense was about $1 million for the fourth quarter, which was roughly flat with the same period a year ago. 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, as well as enhancements and upgrades to our other sonar systems. Our loss from continuing operations for the fourth quarter of this year was $5.1 million, as compared to $2.1 million loss in the third quarter of fiscal 2022. Our fourth quarter adjusted EBITDA from continuing operations was a loss of $4.5 million, compared to a loss of $1.3 million in Q3. For our legacy Land Leasing business, which is classified as discontinued operations, we completed approximately $2.5 million of assets sales in Q4. As of January 31st, we have some miscellaneous equipment remaining, which will likely be monetized in the current fiscal year. MIND’s capital structure and liquidity remained solid. As of January 31, 2022, we had about $18.9 million of net working capital. We continue to have no funded debt or outstanding obligations aside from our normal operating commitments. Also, our cost structure remains lean and flexible. So should 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 over to Rob for some concluding comments.

Okay. Thanks. Mark. While it’s evident that supply chain challenges and inflationary pressures remain a factor. We’re encouraged by what we’re seeing in terms of orders across our business. There will always be some level of micro economic uncertainty, we feel that with a robust -- with the robust interest, customer optimism and quote requests we’ve received to-date, we’re positioned to meaningfully grow revenue in fiscal 2023. Given the possibility of supply chain disruptions, the timing of orders may be pushed. But it’s important to note these orders are not disappearing. We have a strong backlog and we’re seeing increased customer engagement. After taking all of this into consideration, we are confident that fiscal 2023 will be much improved over fiscal 2022. We will always remain vigilant when it comes to our cost management and we’ll navigate any supply chain and logistical challenges to the best of our ability if they should arise. We’re optimistic about the upcoming opportunities for MIND throughout the year and we look forward to achieving our long-term goals and generating meaningful shareholder value. With that, Operator, let’s open the call up for some questions.

Thank you. [Operator Instructions] Our first question today is coming from Tyson Bauer of KC Capital. Please go ahead.

Good morning, gentlemen.

Hi, Tyson.

It appears with your current bookings and backlog that we’re starting the year with 2000 -- your fiscal 2022 already in hand or primarily calendar 2021. So any incremental orders or bookings, is this going to accentuate that growth year-over-year, the current end markets probably as strong as tailwind as you’ve seen in the past 10 years, maybe in the past decade, as far as both defense and with oil being as high as it is. With that scenario on the demand side being there for you, it becomes a story of conversion, getting the orders, getting revenue recognition, getting the cash flow, leads us to the big question with that kind of size of growth potential your cash management, funding and working capital requirements, what is the plan there to be able to smoothly transition without necessarily having to tap the capital markets?

Right. So, Tyson, the capital raise we did last year was really anticipation of this. So a lot of that working capital build, if you will has occurred, as we’ve gone out and done more aggressive, securing the inventory, things of that nature. So as we see things today, we think that we’ll be able to sell fund the continued growth and we’ve using the capital raise last year. If things go dramatically different, maybe that changes, but as we see it today, we think we are position to fund the growth that we’re seeing and the growth that we have in hand, as you point out. I agree with you, I think that, the position we’re in start of the year is without a doubt stronger than anytime the last few years since we’ve made the change, like, for the Leasing business. So it’s definitely a change in the overall market sentiment as a change in our position. So -- and yeah, that makes us feel pretty good about things. Obviously, the downside of that is are the supply chain issues, which are difficult to manage and they’re there, and there’ll be things that we don’t expect will happen. That’s just the way the world is that we’re working really hard to manage those, and again, that was one of the reasons we raised the capital last year.

Okay. And given your anticipation of these orders coming in and building your working capital in expectation of that growth, that $23.5 million, is that obviously stuff that you anticipate getting delivered converting this year with incremental as we go through the year on that side of it? Given that you had some things pushed out of Q4 into this quarter, your quarter-to-date shipments and getting that converted into revenue, and then, of course, into cash. Should we expect any kind of bump to start the year just because of those legs?

Well, certainly, we’re getting some benefit from things that get pushed out. They all didn’t happen in the first quarter necessarily. I think the full $23.5 million we do expect to happen this fiscal year. That’s fair to say, plus other things. So I do expect, of course, a big bump from Q4, that’s not much of a comparison, actually. But I would expect some improvement from Q1 last year as well.

Okay. And when do you anticipate your first SAS delivery or further developments that the market will -- it’ll be apparent to the market?

Excuse me, Tyson. I think later in the summer, we will able, the market will see some things.

Okay. And last one, in case Ross or somebody else is on the call. There has been more chatter about unmanned coastal defense, especially in light of the Ukraine situation and U.S. providing funding and Europe providing funding. I’m sure your partner’s probably involved with that. Also, are you seeing greater interest in your technology for that application directly or indirectly, that you’re able to talk about?

I’d say that we definitely are seeing increased interest in that technology and some of the increase in order activity is directly related to that and I really can’t say much more on that.

Okay. Thank you, gentlemen.

Thank you. [Operator Instructions] The next question is coming from Ross Taylor of ARS Investment Partners. Please go ahead.

Thank you. Tyson, thank you. Couple of quick questions about the business cash flow and operating margin, would you looking at the book of business you have, would you anticipate that operating margin should revert back to the mid-30s this year?

I definitely see improvement. Ross, one of the big factors on drag in margin down is just unabsorbed overhead cost. So just as revenues increase, we actually see an increase in the margin, so we absorb all of that. I also think just given the makeup of the orders that we’re seeing, I think, we’re able to be a little more aggressive from a pricing standpoint. So I would expect significant improvement going back to more historical margins.

And so, therefore, looking at this year, fiscal 2023 -- at fiscal 2023, do you anticipate that by the end of the year looking at your order book and the like you should be operating free cash -- generating cash flow, free cash flow?

Yes. We think by the end of the year?

Go ahead.

We think by the end of the year, we’ll be at that point.

So we’ve been waiting for a long time for, a kind of feel sometimes like someone is glued, we do a chair and take my eyes open and made me watch Waiting for Godot on a continuous loop. Is this the year…

Yeah.

By the end of this year, is this the year we’re going to start to see that breakthrough you’ve been talking about that’s going to push the revenue line from in the $3 million, $4 million, $5 million, $6 million a quarter range to something meaningfully higher than this?

Ross, that’s what we’re seeing right now. I guess what the order book tells us right now. Yeah, obviously, there are uncertainties in the marketplace that could affect that and we will see some quarter-to-quarter variations. Yeah, there’s no doubt. There will be some unexpected events. But there’s no doubt in my mind at least that we are in a much, much stronger position going into this year and are much better positioned to deliver that. And I feel your pain, believe me. I’m watching the same loop as you are.

Yeah. It’s time doesn’t ends. It wasn’t a particularly good film the first time around.

Yeah.

Okay. Looking at this going forward then, when you look at your book of business right now and your book of potential business. Is the defense side of the business the hottest area, the area you are seeing the most growth or is it other areas? I mean, obviously, with the search for things like lithium and rare earths and there’s incendiary [ph] heavy metals and the like. Obviously, in the past there was a lot of talk about undersea exploration…

Okay.

… or the under the ocean being a place we’re going to find that solution. What segment of your business is really what’s driving this, this kind of -- this move that that will further we are going to finally achieve our breakout?

Yeah. So it’s really a bit across the Board. Now, the defense or maritime security market is the largest potential and has been the smallest for us historically. So probably from a percentage growth standpoint, that’s going to be add more meaningful for us I think. But the expiration market is really pick up in strength with the pricing environment for all. But also as you mentioned for, other types of exploration activity, I think, our most recent quarter we announced for the Institute in Korea is really geared towards that sort of activity, that sort of research. So it’s really across the Board I think.

Okay. And I think this company is strategically worth a lot more than it’s trading at, but you and I, and I think, everyone on the call understands that you’ve got to execute to demonstrate that?

Yeah.

If you’re not able to do that, I think, there’s a point in time where you have to recognize that as honorable as your intentions are to get better value for the shareholders you are building. I think there’s a point in here where you kind of look at it this day, the best way to get that value is to find a strategic buyer. I’m sure there are plenty of them, who would be interested in what you bring to the table and will be willing to reward shareholders amply from the current price.

I hear you.

Okay. Thank you, sir. Take care.

Okay, Ross.

Thank you. This concludes the Q&A portion of the call. I would like to hand the call back over to Rob Capps for final comments.

Just like to thank everyone for joining us today. Look forward to talking to you again here just in a few weeks actually, when we record our first quarter for the current fiscal year. Thanks very much.

Ladies and gentlemen, thank you for your participation and interest in MIND Technology. You may disconnect your lines at this time or log off the webcast and enjoy the rest of your day.