Earnings Call Transcript - MIND Q3 2024

Operator, Operator

Greetings, and welcome to the MIND Technology Third 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. I'll now turn the call over to your host, Ken Dennard. Please go ahead, sir.

Ken Dennard, Host

Thank you, operator. Good morning, everyone, and welcome to the MIND Technology fiscal 2024 third quarter earnings 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 few housekeeping items to run through. If you'd like to listen to a replay of today's call, it will be available via webcast by going to the Investor Relations section of the company's website at mind-technology.com or you can listen to a recorded instant replay until December 21. Information on how to access these replay features was provided in yesterday's earnings release. Information reported on this call speaks only as of today, Thursday, December 14, 2023, 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 in 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 press release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements. With that now behind me, I'd like to turn the call over to Rob Capps. Rob?

Rob Capps, CEO

Okay. Thanks, Ken, and thank you all for joining us today. I'll start by addressing some key achievements during the quarter and highlights of our results. Mark will then provide a more detailed update on our financials, and I'll return to wrap things up with some remarks about our outlook. First, I want to address two very significant achievements for MIND. During the quarter, we took a meaningful step towards streamlining and focusing our operations with the previously announced sale of Klein to General Oceans for cash consideration of $11.5 million. We utilized a portion of those proceeds to repay our term loan, eliminating our outstanding debt. This transaction, which resulted in a financial gain of almost $2.4 million, has provided us with important liquidity and financial stability with which to exploit the remarkable growth we're seeing within our Seamap business. Now, this brings me to our second achievement. We ended the third quarter with a record backlog of $37.4 million, over double where it was just three months ago. I'll touch on this in greater detail shortly, but I believe this unprecedented backlog is indicative of our specialized capabilities and product lines. Additionally, subsequent to the end of the quarter, we entered into a supply agreement with a major international seismic contractor. We expect to receive initial orders under this agreement shortly. This means that we start the fourth quarter of this fiscal year moving into next fiscal year with a record backlog and confidence in continued order flow. Our Marine Technology Products revenue during the third quarter was approximately $5 million, and this was significantly lower than we had anticipated. We experienced delays in the delivery of certain components, which prevented us from getting these orders completed, out the door and recognized as revenue before quarter-end. These orders, which total from $5 million to $6 million, are expected to be delivered in our fiscal fourth quarter. This situation clearly demonstrates that supply chain issues, while much improved from a couple of years ago, are still with us and can impact results in particular periods. The good news here is that the orders are not lost, merely delayed. The magnitude of our backlog does give us better visibility and therefore better ability to manage our procurement process. However, the increased level of activity also means increased capital requirements. Based on the orders that were delayed and the schedule of other orders in our backlog, we expect a significant increase in revenues in our fourth quarter. We continue to believe that MIND is exceptionally well positioned to capitalize on the favorable market dynamics to achieve sustainable top-line improvement. We think our record backlog is indicative of the growing demand for our differentiated Seamap product lines such as GunLink source controllers, BuoyLink positioning systems and SeaLink streamer systems. We believe this continued positive backlog trend and the early benefits of our framework agreement reflect the strength in the underlying market and demonstrate that we are the partner of choice for companies looking to acquire high-quality and versatile marine technology products. We continue to believe that the current market environment is advantageous for MIND. Each of our three key markets, exploration, defense, and survey, remains loaded with opportunity. Having completed the sale of Klein in August, we now operate a more streamlined and focused suite of products, and we're better positioned than ever to deploy our product lines into a variety of end markets. Additionally, our team continues to develop new and innovative ways to adapt and implement our technologies to meet the evolving needs of our customers. In addition to traditional energy-related opportunities, we are seeing new applications for our Seamap technologies. As an example, our backlog includes over $5 million related to one of our SeaLink ultra-high-resolution 3-D seismic streamer systems. This system is intended for use in surveys required for 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 the commercially developed SeaLink system, is a significant and economical solution for various demanding applications within this space. We are also optimistic that through our collaboration agreement with General Oceans, we will see increasing interest in our Spectral Ai Software Suite and find further applications for this technology. And with that, let me let Mark walk you through our third quarter financial results in a bit more detail.

Mark Cox, CFO

Thanks, Rob, and good morning, everyone. At the outset, I would like to point out that with the sale of Klein, those operations have been treated as discontinued operations and prior period results have been restated to reflect that. Accordingly, the results from continuing operations that we reported yesterday and are discussing here today, including prior period comparative data, do not include amounts related to Klein. They include only our ongoing business. As Rob mentioned earlier, revenues from continuing Marine Technology Products sales totaled approximately $5 million in the quarter, which was up about 64% from approximately $3 million in the same period a year ago. While we experienced several delays during the third quarter that resulted in some revenue getting pushed into the fourth quarter, we believe the strength we are seeing in all our key markets and the growth in our backlog of orders positions us well for sustained higher revenue levels in the coming quarters. Gross profit during the third quarter was approximately $2.3 million, which was up meaningfully when compared to gross profit of approximately $862,000 in the prior-year period. This represents a gross profit margin of 45% for the quarter. We're pleased that we were able to deliver some higher margin orders during the quarter despite the overall lower sequential revenue levels. Revenue in the quarter was largely driven by sales of spare parts as opposed to sales of full systems. These transactions, while smaller in size, tend to generate higher gross margins. Our general and administrative expenses were approximately $2.9 million for the third quarter, which was down slightly when compared to approximately $3.5 million from the second quarter and $3 million for the same period a year ago. The sale of Klein is allowing us to streamline our operations and thereby reduce some costs. We've recently taken some actions in this regard, including selected headcount reductions, reducing the size of our Board of Directors, and reducing the compensation for the remaining members of the Board. We also believe that the more streamlined operations will result in lower professional fees and travel costs. We will begin to see the impact of these changes in the fourth quarter of this year, but will not recognize the full benefit until next fiscal year. In the third quarter, the impact of cost reduction measures taken earlier this year was partially offset by severance costs and higher professional fees. Our research and development expense for the third quarter, which relates only to our continuing operations, was approximately $508,000, up slightly from the comparable period a year ago. These costs are largely directed toward the development of our next-generation streamer system and continued development of our Spectral Ai Software Suite. Operating loss for the third quarter was approximately $1.5 million, which was nearly a 50% improvement from the loss of $2.9 million in the third quarter of fiscal 2023. Our third quarter adjusted EBITDA from continuing operations was a loss of $1.1 million compared to a loss of $2.4 million in the third quarter last year. Overall, we reported net income of approximately $568,000 for the third quarter of this year, driven by a gain of approximately $2.4 million on the sale of Klein. As of October 31, 2023, we had working capital of approximately $16.5 million and approximately $5.6 million of cash on hand. After factoring in net proceeds from the Klein sale completed in August, our liquidity position is significantly improved. Additionally, as a reminder, upon the closing of the sale of Klein, we repaid and eliminated our high-cost debt, leaving MIND debt-free today. I'll now pass it back over to Rob for some concluding comments.

Rob Capps, CEO

Okay, thanks, Mark. Our conviction about the future of MIND Technology has only been strengthened by recent achievements. We've taken the necessary steps to streamline our operations and focus on profitability. We believe that this company is better positioned now than ever. Our Marine Technology Products continue to penetrate a variety of industries and markets, which I believe is a direct correlation to the work that our team has done to develop and continually adapt our technology to meet the evolving needs of our customers. We believe that the record backlog that we have achieved is just the beginning, as there are still significant opportunities for our Seamap unit and our other initiatives. Market conditions remain favorable, and we genuinely feel that the robust customer interest and engagement that we've seen to date signifies that the market adoption of our product lines is gaining traction. We're confident that MIND is headed in the right direction. We look forward to building on the strong foundation that we've constructed. As I mentioned earlier, the increase in business comes at a price, that being the capital needed to execute the growing business. As you probably know, we did declare and pay a dividend on preferred stock for the quarter ended October 31, 2023. However, it remains about $4.7 million as accumulated dividends from prior periods and the ongoing dividends accrued at a rate of about $3.8 million per year, while our liquidity and financial position have much improved, we do not believe that our current operations can generate the capital needed to exploit and grow our business and, at the same time, pay ongoing or accumulated dividends on the preferred stock. Therefore, while no decisions have been made and circumstances can change, we currently believe it unlikely that we will declare further dividends on our preferred stock for the foreseeable future. As we experienced 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 the general trend will be one of increased revenue. The favorable market trends, robust customer interest, and substantial growth of our backlog continue to give us confidence that sustainable, higher-level revenue is achievable. Looking forward, we anticipate meaningful financial improvements in the fourth quarter and in fiscal 2025 as we convert our record backlog to revenue. We're encouraged by the current macro environment and believe that our streamlined, differentiated, and market-leading suite of Maritime Technology Products is uniquely positioned to capitalize on favorable customer demand. We expect to continue adding new orders in the coming months and to then utilize this momentum to drive meaningful shareholder value. And with that, operator, we can now open the call up for some questions.

Operator, Operator

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

Tyson Bauer, Analyst

Good morning, gentlemen.

Rob Capps, CEO

Hey, Tyson.

Tyson Bauer, Analyst

I'm trying to get a where we are today kind of look at the company, and all this is going to lead up to the eventual question of where we need to get to. But you ended the quarter with $37.4 million of backlog, $5 million to $6 million of that is because we had deferred revenue that will fall into this quarter. So, you have approximately $32 million backlog. That is a significant increase from $17 million at the end of July. Where are you kind of today and where your backlog stands relative to also your recognized revenue in the quarter? Has that $5 million to $6 million been realized already along with your other expected revenue you thought you were going to have? Or is this a situation where the components delay really has pushed everything to the right of the calendar, so we don't necessarily have that catch-up where all of a sudden we have a $12 million, $15 million quarter?

Rob Capps, CEO

Yes, some of the delayed orders have been partially shipped, but they are not all finished yet. We expect to complete them by the end of the quarter, and mostly by the end of the calendar year. Therefore, we anticipate some level of catch-up this quarter. The delays are not entirely negative; one component from a supplier was two months late, which impacted our original schedule for production and delivery.

Tyson Bauer, Analyst

Are these components similar to those used by automakers where they can build the vehicle and then add the chip before shipping it? Is it that in this case, you're only waiting on the final component to complete the product, or is this something that halts the entire process from the start?

Rob Capps, CEO

Well, it's kind of halfway in between, that's the way I'd describe it. It certainly is a drop-in and we can complete much of the system, but we have to drop-in this component before we can then complete everything else. So, it's a little bit of both. So, we certainly have been able to continue with production and have things ready. We have components sitting on the bench right now that we're dropping-in, to use your term, to finish this. I think, of course, then there's software to be burned in, things of that nature, part of the process that has to happen at the end. So, we have been able to continue with the process, like the thumbnail of your question.

Tyson Bauer, Analyst

Okay. For clarity, you mentioned in the last call that you expected $5 million to $6 million would be deferred, which suggests you anticipated reaching $10 million to $11 million in the quarter. You also indicated that the quarters would be somewhat similar, depending on timing issues. Does this mean you expect to enter this quarter anticipating around $10 million, with the $5 million to $6 million being additional, or could you provide more clarity on that?

Rob Capps, CEO

No, I understand where you're going. The answer is yes, although I understand just the caveat, things can happen and we can have something drop in unexpectedly, we do better. We get something pushed to the left or to the right rather, for whatever reason, but fundamentally, your analysis is correct.

Tyson Bauer, Analyst

Okay. When we look at where your accounts receivable were or was at the end of July compared to where it was, obviously, you have the benefit of Klein drops out of that, obviously. Also, you didn't have the sales that were realized in the quarter. Does that anticipate, if we go back to that July level and that level of business that you're expecting to do since you haven't made all the deliveries as of yet, a $3 million working capital requirement, just on that alone, not looking at additional inventories in that, which would leave you at the end of the fiscal year, roughly $2.5 million of cash left?

Rob Capps, CEO

There's a lot of calculus that goes into that, Tyson. So, I'm not sure I'd draw that exact conclusion. Certainly, delayed shipments mean delayed cash flow coming in, but there'll be some catch-up there as well. We have had to use working capital to buy components, so there's some benefit there. There are some contracts that we have advanced payments on, prepayments from customers. So there's lots of things that go into that calculus. But I think the message is, with increasing business, that means there is an increase in working capital requirement, be it receivables, be it inventory. And so, that's the reason we're trying to take the position we are.

Tyson Bauer, Analyst

Okay. Ultimately, all these questions will boil down to the operational level you believe is necessary to restart the dividend while also addressing your working capital needs in light of the growth outlook. We have observed a $2 million increase in your inventory, which was offset by a decrease in accounts receivable. At the $5.5 million mark where you finished the quarter, do you expect to sustain that level, or will it be further pressured by the end of the year? Additionally, what level would be comfortable for you to reevaluate whether you have the operational results to reinstate the dividend and meet your requirements?

Rob Capps, CEO

So, Tyson, we don't have a definitive answer right now because we need to assess how the business will manage cash flow and working capital as it moves through the production cycle. This is why we prefer to be cautious and reserve our resources for the time being. The improvement in our backlog is significant, far exceeding anything we've experienced before. Therefore, we believe it's wise to prioritize serving the business and ensuring we can execute our plans before making any decisions regarding the preferred stock. At this point, no decision has been made.

Tyson Bauer, Analyst

And foreseeable future, if we get through and we play a little catch-up, as you just mentioned, and we start kind of getting a more stabilized flow as long as component supply is there, does that imply by the end of Q1 of the next fiscal year you should be in a more comfortable position on where you're at to make that decision? I mean, is foreseeable future one, two quarters or is it 'don't expect anything for the next fiscal year'?

Rob Capps, CEO

I said I don't know at this point. That's what we're trying to understand. So, I can't give you more guidance than we have here.

Tyson Bauer, Analyst

Okay. The pending contract structure, obviously you're not going to name who and it probably doesn't make that big of a difference. Are those more for components, whole systems that you are going to be supplying, which obviously is going to be far more lumpy? And does that imply that they're operating as kind of a middleman as opposed to the end user, which is typically your customer?

Rob Capps, CEO

They're for full systems. They are the end user. And there is a production schedule that we're working out with them over the next several quarters.

Tyson Bauer, Analyst

Okay. So, when we see orders from them, these are going to be for whole systems. So, we're looking at the $1.5 million all the way up to $4 million type systems that they would be purchasing at a time?

Rob Capps, CEO

Correct. Maybe even some smaller systems as well. But yes, the answer is yes.

Tyson Bauer, Analyst

Okay. And is this a multi-year agreement?

Rob Capps, CEO

It is.

Tyson Bauer, Analyst

Is there an accordion-type feature to this where you've set the price and it's just a function of that price will be good for what they need going forward?

Rob Capps, CEO

No, I don't want to get into specifics for some committed reasons as you might imagine.

Tyson Bauer, Analyst

Okay. But we should see before the end of the year some more details and color come from this contract that will make it clear and obvious to the rest of us, the scope of it?

Rob Capps, CEO

I usually will. I think I'm very confident about that.

Tyson Bauer, Analyst

Okay. All right. I mean, for right now, I'm sure Ross is in queue. We'll let him take over. But it looks like, at least operationally, you're where you want to be. It's just what are we going to do on the decision on that accumulated deficit on the preferred and what's it going to take to actually catch-up business-wise to basically create that residual value for the common once we satisfy the preferred side. So, hopefully, we'll know that in a quarter or two.

Rob Capps, CEO

Okay.

Operator, Operator

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

Ross Taylor, Analyst

Well, Tyson was right.

Rob Capps, CEO

Don't tell him that.

Ross Taylor, Analyst

He understands it now. We've discussed the importance of paying this dividend because the equity is dependent on it. For those of us who hold equity, we want and need you to resolve the preferred issue so we can begin to realize the value that will grow in this company. I have a couple of questions first. What was the impact on inventory and working capital last quarter from the deferred sales? Clearly, you were building products and incurring costs that didn't translate into revenue. What kind of impact did that have?

Rob Capps, CEO

Our inventories over the last six months are up about $3 million roughly.

Ross Taylor, Analyst

Okay. So, as you sell that out, we should start to see that cash flow should come in?

Rob Capps, CEO

Yes. But understand we're going to continue building...

Ross Taylor, Analyst

Yes, I understand. As you accumulate backlogs and accounts receivable, we discussed that you can take measures such as factoring accounts receivable. The preferred debt you have is the most affordable option, yet it also takes up resources. Currently, that preferred equity holds around $46 million in value, while your common equity is valued at about $8 million. As I mentioned before, to see my equity increase, addressing the preferred stock situation is crucial. What concerns me is that you often assure us that the company will perform well, then as soon as you seem ready to move forward, it feels as though you're unsure about paying the fourth-quarter dividend, raising questions about why the third quarter dividend was paid. It would be wiser to conserve funds for future success. I can't help but feel that your management resembles that of the Seattle Mariners, which isn't a compliment. I'm struggling to grasp your perspective because while you express concern, there are numerous financing alternatives available to you. Honestly, if I were on your Board, I would suggest opposing the dividend. The key question would be whether to hire a banker to either short the company or collaborate with Tyson for an ATM to raise $5 million. Based on my calculations, buying back around 500,000 shares for $5 million could generate approximately $3.33 extra value per share for the common stock, resulting in more than a 50% increase from its initial value. It seems vital to concentrate on enhancing our status as a public company and instilling confidence in investors. It feels like every time we’re close to a breakthrough, we face another setback. How do we avoid that? Regarding Tyson's question about uncertainty, I understand that you don’t have all the answers, but you need a plan that includes alternative capital-raising strategies. I believe ultimately, utilizing the preferred dividends for capital is more advantageous than seeking general market financing. Am I mistaken?

Rob Capps, CEO

Ross, I understand all your comments. Believe me. Nothing is news to me on this side. I understand completely.

Ross Taylor, Analyst

It's not new information, but to be honest, the fact that you mentioned not having made a decision just two weeks before the end of the year is quite frustrating, Rob. We've known each other for a long time, and I've been a loyal shareholder. It's disappointing to see this happen right now because it impacts your reputation much more than the possible loss of one quarter's dividend. It feels like all the credibility you've built is going to need to be rebuilt. The Board should acknowledge this situation. You have cash available and valuable opportunities coming up. Your credibility as a public company is important; it's different from being private. You have responsibilities to your shareholders, and I'd prefer to see you issue equity to keep me involved in this process. Eliminating that preferred stock, especially if you can buy it back at $10 or $12 a share, would be a significant win for us shareholders. We need to think strategically about the plan moving forward. I know this isn't a pleasant discussion, but I'm unhappy with how things are shaping up. It feels like we're back where we were a year or two ago, despite believing we were in a better position.

Rob Capps, CEO

Okay.

Ross Taylor, Analyst

Thank you.

Rob Cpps, CEO

All right. I appreciate the comments, Ross.

Operator, Operator

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

Rob Capps, CEO

All right. Thanks, everyone, for joining us today. I look forward to talking to you at the end of our fourth quarter. Thanks very much.

Operator, Operator

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