Mind Technology, Inc Q2 FY2024 Earnings Call

Greetings, and welcome to the MIND Technology Second Quarter Fiscal 2024 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's now my pleasure to introduce your host, Ken Dennard. Thank you, and you may begin.

Thank you, operator. Good morning and welcome to the MIND Technology Fiscal 2024 second quarter earnings conference call. We appreciate 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 few items to cover. If you'd 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 telephonic recorded instant replay until September 21. Information on how to access these replay features was provided in yesterday's earnings release. Information on this call speaks only as of today, Thursday, September 14, 2023, and therefore, you are advised that time-sensitive information may no longer be accurate at 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 SEC filings, including its annual report on Form 10-K for the year ended January 31, 2023. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our news release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements. And now, with that behind me, I'd like to turn the call over to Rob Capps. Rob?

Okay. Thanks, Ken. Now, as I believe you all know, in August, we took a significant step with the sale of our Klein unit. Today, I'd like to begin by discussing that transaction and the rationale for it before discussing our second quarter 2024 results, as well as our current view of market conditions. Mark will then provide a more detailed update on our financials. I'll then wrap things up with some remarks about our outlook. With the strengthening outlook for our Seamap unit, that we'll discuss further in a moment, we thought it was important to streamline MIND's operations and address the financial requirements associated with our growing business. When the opportunity to sell Klein arose, we saw an opportunity to achieve both those objectives. Our Klein business unit was responsible for approximately $3.1 million in revenue during the first six months of this fiscal year, but contributed an operating loss of about $911,000. On a pro forma basis, had the sale taken place at the beginning of the year, MIND would have reported a positive pretax income as opposed to the $1.2 million loss we reported. This further demonstrates the basis for our decision to part ways with the Klein business unit and focus our attention on other operations. As we've previously disclosed, consideration from the sale was $11.5 million in cash. We used a portion of these proceeds to repay the $3.75 million term loan from earlier this year. After transaction costs and the loan repayments, the net proceeds available to us amounted to about $7.3 million. An added benefit from the sale is the licensing arrangement and collaboration agreement with the buyer, General Oceans. This provides an important opportunity to realize value from our Spectral Ai software suite, which MIND retains. Through this arrangement, we hope to realize recurring licensing revenue while continuing to enhance Spectral Ai important to applications beyond analysis. Our second quarter results came in roughly in line with our expectations. Revenues dropped off a bit sequentially due to the scheduling of deliveries. That was largely anticipated. This activity is not unusual, and I'll remind you that revenues often fluctuate in our business from time to time for a variety of reasons that are often out of our control. We continue to believe that MIND is exceptionally well-positioned to capitalize on the favorable market dynamics to achieve sustainable top-line improvement long term. As of July 31, our backlog of firm orders for Seamap stood at $17 million. Subsequent to quarter-end, we received additional orders totaling approximately $5.4 million. And we also have confidence that in coming weeks, we'll be in a position to announce additional sizable orders that we feel are imminent. These booked and pending orders involve a variety of products, including GunLink Source controllers, BuoyLink positioning systems, and SeaLink streamer systems. We believe this continued positive backlog trend is indicative of the favorable market conditions and the differentiation of our Seamap product lines. We remain confident that this momentum will carry throughout the remainder of our fiscal 2024 and beyond. We believe the current market environment is advantageous for MIND. Each of our three key markets, exploration, defense, and survey, are loaded with opportunity. With our operations now streamlined and focused, we are better positioned than ever before to deploy our product lines into a variety of end markets, and our team continues to develop new and innovative ways to adapt and implement our technologies to meet the needs of our customers. In addition to traditional energy-related opportunities, we're seeing new alternative applications for our Seamap technologies, including offshore wind farms and other green energy projects. There's also a growing opportunity for MIND to provide seismic streamer repair services, not only for SeaLink streamers but also for products manufactured by others. Within the maritime defense and security market, we continue to believe that our Sea Serpent passive array system, which is derived from our commercially developed SeaLink system, is a significant and economical solution for a variety of demanding applications within the space. We intend to continue leveraging the favorable macroeconomic trends, the differentiation and versatility of our product lines, and a sustained customer demand and interest that we're seeing to drive robust order activity and growth in our book of business in the near term. Now, I know many of you are interested in our plans regarding dividends on our preferred stock. While our liquidity position is much improved, we are continuing to evaluate the working capital requirements associated with our growing backlog of business. Accordingly, at this point, we have not made a decision regarding accrued or ongoing dividends. We will, of course, update you once any decisions are made. As many of you are aware, we held our Annual Shareholder Meeting on August 30. Included on the agenda was the proposal for the approval of a reverse stock split that would enable us to regain compliance with the NASDAQ listing standards. Our shareholders approved this proposal. This was an important and necessary first step, and NASDAQ has granted us until November 15 to regain compliance with a minimum share price requirement. We're now going through the internal mechanics of implementing the reverse split and will provide an update on the specific framework as things evolve. Now, I'll let Mark walk you through our second quarter financial results in a bit more detail before I come back.

Thanks, Rob, and good morning, everyone. As Rob mentioned earlier, revenues from continuing operations totaled approximately $8.8 million in the quarter, which was roughly in line with the revenues of $8.7 million in the same period a year ago. Our Seamap segment delivered revenue of approximately $7.6 million during the quarter, which we believe is largely indicative of the continued strength that we're seeing in the exploration and alternative energy markets. Gross profit during the second quarter was approximately $3.3 million, which was marginally down when compared to gross profit of $3.5 million in the prior year period. This represents a gross profit margin of 37% for the quarter, a 330 basis point decrease when compared to the same period a year ago. Gross profit margins for the Seamap segment were up approximately 300 basis points year-over-year, while current period gross profit margins in the Klein segment declined significantly from the prior year period. The decline in gross profit margins for the Klein segment was due to sales of higher-margin multi-beam sonar systems in the prior year period not recurring in the second quarter of fiscal 2024. Our general and administrative expenses were approximately $3.5 million for the second quarter, which were down slightly when compared to the $3.9 million from the first quarter and $3.8 million for the same period a year ago. The improvement over the prior year period is mainly due to reductions in executive-level headcount as well as other cost management initiatives that we've implemented. Our research and development expense for the second quarter was $842,000, which was up slightly both sequentially and when compared to the year-ago period. Consistent with prior periods, these costs are largely directed towards our strategic initiatives, including synthetic aperture sonar and passive sonar array. Operating loss for the second quarter was approximately $1.5 million, which was essentially in line with a loss of approximately $1.6 million in the second quarter of 2023. Our second quarter adjusted EBITDA was a loss of $687,000 compared to a loss of approximately $1 million in the second quarter last year. As of July 31, 2023, we had working capital of approximately $13 million and cash of $494,000. After factoring in net proceeds from the Klein sale in August, our liquidity position is significantly improved. As Rob noted in his opening comments, upon the closing of the Klein sale, we also repaid and eliminated our high-cost debt that we incurred earlier this year, and MIND is once again debt-free. I'll now pass it back over to Rob for some concluding comments.

Thanks, Mark. We're more excited than ever for the future of MIND Technology. We've taken the necessary steps to streamline our operations, and as we sit here today, we are a more focused and efficient company. We think the opportunities for our Seamap unit are significant. The coupling of favorable market conditions and our differentiated and versatile product offerings is a recipe for long-term success. We're seeing greater customer interest and engagement and historical highs in order flow, which contributes to our high expectations for meaningful and sustained growth. We're confident that MIND is headed in the right direction. We look forward to building on the solid foundation that we've constructed to date. Our Seamap technologies continue to gain traction with customers globally for a variety of end uses, and our team has done a great job adapting our technologies to meet the evolving needs of our customers. As we look forward to the back half of the year and into fiscal 2025, we intend to capitalize on this positive momentum to drive improvements in our financials. The experience this quarter and have traditionally seen, there will likely be revenue variation between quarters due to a variety of challenges and unforeseen circumstances as well as simple customer delivery requirements. With that said, we do believe that the general trend will be one of increased revenue. The favorable market trends, robust customer interest, and growth of our backlog continue to give us confidence that sustainable higher-level revenue is achievable. We've worked hard and taken the necessary steps to position MIND as a leading producer of differentiated marine technology products, and we're excited about what the future holds. As of today, we're debt-free. We have a much improved balance sheet and liquidity position. We intend to continue capitalizing on the favorable market conditions, strong customer interest and engagement, and robust order flow to achieve improved results, which we believe will generate meaningful shareholder value going forward. And with that, operator, we can now open the call for questions.

Thank you. We will now conduct a question-and-answer session. Our first question comes from Tyson Bauer with KC Capital. Please proceed with your question.

Good morning, gentlemen.

Hey, Tyson.

Do you happen to have, just a bookkeeping question right off the bat, kind of the cash balance of where you were as of this morning or last night?

I mean, yeah. I'm not sure if I want to talk about that specifically. But again, if you look at where we were at the end of the quarter, $0.5 million or so, we've added $7 million or so from the sales, so that's going to give you a sense of magnitude.

Okay. And then have you had cash conversion? Obviously, you had some significant accounts receivable with the lower revenue, so I'm guessing just that timetable of converting those receivables to cash?

Yeah. We will certainly continue to do that. But also remember, we have a large backlog that we are starting to build, so there are ongoing needs as well. This is a combination of things.

Okay. If we look at the first six months in Seamap, there's approximately $18 million. You're referring to some level of revenue growth as we move forward. I'm assuming you're using that $18 million for Seamap as a basis. That would suggest at least $36 million for the year, if there is any growth between $36 million and $40 million, depending on shipment timings and other factors that could complicate that. But as of now, is that your perspective, that the revenue will be between $36 million and $40 million?

I don't want to get too specific, but I believe you are heading in the right direction regarding the magnitude. The history from the first six months is relevant, and our backlog activity provides visibility for the remainder of this year and into next year, which is crucial for several reasons. However, it’s important to remember that various factors can cause certain shipments to be delayed. Some of these orders are quite large, in the millions of dollars, so even a couple of delays can have an impact. It's essential to keep this in mind, but the overall trend aligns with your description.

Okay. Historically, the margins on Seamap have typically been around 50 percent or higher on the growth side, depending on the capacity utilization and the quantity that can actually be produced and delivered.

Yeah. Maybe not quite that. I'd say in the high 40s, just kind of where we've seen things historically. We have a reasonable inflow or throughput to the operation. Since we do have visibility going forward, that gives us some opportunities, we think, to be a bit more aggressive in some of our procurement activities as well as in some of our production operations, so we're hopeful to be able to improve that somewhat. But it's really been in the high 40s historically.

And you have been already previously talking about $1 million reduction in your corporate expenses and your G&A expenses even before you did the Klein. Would anticipate some additional savings out of that as we go forward and whatever was allocated to Klein on those corporate. What are you anticipating now kind of as a go forward on those G&A expenses? And then a follow-up, your R&D, was that primarily related to Klein or what portion of that…

I’m going to hold off on providing a full answer right now. When we file our 10-Q later today, we’ll include some pro forma financials that should clarify the impact we're discussing. We mentioned it earlier, but those documents will give you a clearer picture. Essentially, the Klein R&D will be eliminated, which accounts for a significant part of our R&D expenses. The direct Klein G&A will also be removed, and we believe there are ongoing opportunities to further streamline our operations. I haven’t fully calculated those yet, but it's something we're aiming to achieve for greater efficiency. Please refer to the pro formas in the 10-Q for more detailed information.

And your interest expense goes away also?

Yeah. Absolutely, absolutely. Yeah.

And I guess what I'm leading you to is, and just doing the back of the napkin type of numbers is, should your directors choose to pay forward preferred dividends, the financial wherewithal is there, it may be tight initially, but obviously, you'll have the cash balance. You will have the financial wherewithal on ongoing financial operations to pay that if you decide to do so?

We are currently assessing the overall situation and exploring ways to stabilize our ongoing overhead costs. We are also considering the working capital requirements to avoid a repeat of last year's circumstances where we had to operate with minimal resources. That approach is not sustainable for us as it negatively impacts operations. There are notable improvements, and you'll be able to see the numbers in the pro formas to form your own conclusions. We will factor all of this into our decision-making process.

Okay. And that decision likely we'll know in early October, which is the time that you have to decide whether to defer or to at least make that October payment on the preferred?

Yeah, that's correct. That's right.

Currently, we are not in a position to address the accrued amount, so our focus is on whether to make the current payments moving forward. At some point in the future, we will need to decide if we can back pay the accrued amount.

I don't want to comment on that, Tyson. It's all on the table right now. We're just going to look at the overall situation.

Okay. In your 10-K regarding the reverse split, it appears that even though it is until November 15, you will make a decision or a split, if it were to occur, would occur on the end of October, which the implication is if you have to have 10 days above $1, that would have to occur within the next four weeks. So…

Yeah. You're right about that.

Scenario is that we have a reverse split, one for 10, just throwing that out there because that was in the proxy, will occur or would likely occur at the end of October?

That is not an unreasonable assumption.

Okay. Oil, $90. Heating oil dropped 40% since July. A lot of tailwinds are building that would be favorable for Seamap. And just to give the listeners a little sense, when your major competitor left the market a year ago, a lot of these decisions on whether or not you get a contract or not is whether the ultimate customer just wants to go ahead and place that order. It's not really a competitive situation where you're going against somebody else as we've seen in years past.

Yeah. As it relates to source controllers, that is definitely the case. We were pretty much the only game in town. We do have some competition for the positioning systems, BuoyLink, and we do have some competition for the streamer systems, but we are focused more on the high-resolution, three-dimensional applications used for survey purposes more than deepwater exploration. So we don't go head-to-head with the deepwater streamer systems. So we do have some competition there, but it's pretty thin, it's fair to say.

Okay. And yourself and Mark are not on the Board, correct?

I'm on the Board. Mark is not.

You're on the Board. The Board is going to ask for your recommendation, being the CEO, and the CFO's recommendation on outlook and financials. Are you willing to share what you would recommend? Even though that there's only one cog in the decision that the Board will make ultimately in regards to the preferred and going forward?

Yeah. No, I don't think we're going to comment on that. The Board as a whole will make that decision, so it wouldn't be appropriate for me to comment on that.

Okay. Thank you, gentlemen.

You bet.

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

It's always a challenge to follow Tyson since he raises all the important fundamental questions. Rob, I'd like to share a few thoughts. The preferred stock is actually a solid asset, and it's especially advantageous for you. You can't enter the market after paying off a term loan that was around 12.9%. This preferred stock is nearly 400 basis points below that rate. If you and the Board decide not to settle this, as an equity holder, I've been waiting a long time for you to make the right decision. You're getting close, but I worry that you're on the verge of missing an opportunity because if I were a preferred holder and got two directors, I'd be instructing them to hire a banker. Given your plans and your belief, there's still a hesitance in your comments that makes it hard for this Board to reject any deal suggested by a banker that would benefit the preferred holders while leaving equity holders with little. It's crucial to alleviate the burden on common holders; it should be a simple process. You can't secure loans at 9%, and you should initiate this, as it’s better than going to the bank. Eventually, you might be able to borrow at high single digits in the current market. I'm frustrated and have a sense that common holders will end up with little, and you may resort to a reverse stock split to raise the stock price above $1. However, that $8 million to $9 million in value for the common stock is largely dependent on you resolving the issues with the preferred holders. You’re on the Board, and I've known you for a long time; I believe you are both good and intelligent. I can't accept that you and the Board might decide to defer payments again. I trust Tyson’s judgment, and I bet some preferred holders have conversations with him, likely believing that this company is worth between $26 million and $50 million or possibly more. If it’s sold for $50 million, the preferred holders will receive everything, and that cannot be allowed to happen. Can it?

Ross, I hear your comments and I take those into consideration. So I hear you.

I want to be honest. I don't want to return to a call after supporting you for so long, only to find out that for the sake of $1 million paid to the preferred holders, the equity holders are left with nothing. I've been patient long enough. This hasn't turned out to be a successful investment for me, but we still have the chance to turn things around. Let's make it happen.

Okay. I appreciate it, Ross. Thanks. I really appreciate your comments.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Capps for any final comments.

Okay. Thank you, Melissa. Thanks, everyone, for joining us today. I look forward to talking to you at the end of our next quarter. So everyone, have a good day. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.