Mind Technology Inc

NASDAQ:MIND

Earnings Call Transcript 2025-Q1

[Operator]

Greetings, and welcome to the MIND Technology First Quarter Fiscal 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you, sir. You may begin.

[Ken Dennard]

Thank you, operator. Good morning, and welcome to the MIND Technology Fiscal 2025 First Quarter Earnings Conference Call. We appreciate everyone 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, 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, and that's mind-technology.com or via telephonic instant replay recorded until June 18.

Information on how to access these features was provided in yesterday's earnings release. Information reported on this call speaks only as of today, Tuesday, June 11, 2024, and therefore, you're advised that time-sensitive information may -- no longer be accurate as of the time of any replay listing or transcript reading. And 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 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, 2024.

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 are covered by these statements.

Now with that behind me, I'd like to turn the call over to Rob Capps. Rob?

[Robert Capps, executive]

Thanks, Ken, and thank you all for joining us today. I'll start by discussing some highlights from the quarter. Mark will then provide a more detailed update on the financials, and I'll wrap things up with some remarks on our outlook. It has been 6 weeks since our fourth quarter and year-end call, so you can expect that many things haven't changed much since then. We're pleased to again report positive results. We continue to operate efficiently, while converting our backlog into the higher level revenue. We've been able to build on the momentum that we generated last year, this resulted in another quarter of positive adjusted EBITDA and overall profitability for MIND. We remain well positioned to achieve positive adjusted EBITDA and favorable results in future periods.

We maintain our belief that MIND is strategically positioned for growth. Our GunLink source controllers, BuoyLink positioning systems and ceiling streamer systems are all contributing to our strong backlog, and we're optimistic that we'll generate additional orders for these products as the year progresses. A favorable macro environment, a narrowed focus, strong customer relationships ever-increasing capabilities and valuable partnerships have boosted our order flow in recent quarters. I remain confident that we're the partner of choice for companies looking to acquire high-quality and virtual marine technology products.

We entered this quarter with a strong backlog of approximately $31 million. Our backlog is down a bit sequentially, this is to be expected at times as we execute and make deliveries. New orders don't necessarily arrive at a constant rate throughout the year. We still maintain a meaningful book of business that is significantly above [ 4 study ] a year ago. In fact, the backlog at the end of the quarter was over 70% higher than of last year's first quarter. We believe this robust backlog and the many other opportunities that we are pursuing bode well for favorable future financial results.

As always the case, the timing of certain orders is subject to variability due to any number of challenges, unforeseen circumstances or customer delivery requirements. I continue to believe that this order flow is indicative of our specialized capabilities and differentiated product lines, and I'm encouraged by the implications of this for future results. Our Marine Technology Product revenues for the first quarter of fiscal 2025 were $9.7 million. Our ability to sustain higher revenue levels despite the challenges of shipping order and delivery schedules is a direct representation of the strength in customer engagement, macro tailwinds and resulting order flow that we're experiencing.

We've also taken necessary steps to improve our cost structure, which has enhanced our profitability in recent quarters. While supply chain issues are much improved, they are still with us to varying degrees and can impact results in particular periods. These challenges are simply a component of doing business, and we will almost certainly encounter them again in the future. The magnitude of our backlog and expected orders does give us better visibility and therefore, a better ability to manage our procurement process and improve margins.

However, as evidenced this quarter, the increased level of activity also means increased capital requirements. As you'll note, in this quarter, we did utilize liquidity to fund working capital requirements consisting of increased accounts receivable and inventories. We continue to believe that the current market environment is advantageous for MIND, each of our key markets remain loaded with opportunity. In addition to now operating a more streamlined and focused suite of products, our team continues to develop new and innovative ways to adapt and implement our technologies to meet the evolving needs of our customers. We're confident that we have the best-in-class technology to differentiate MIND from its competitors and address the growing demand sorrounding recent developments within the marine technology industry.

Included in our backlog are orders for high-resolution survey systems, some of which we expect to deliver in the second quarter. These systems are often used to detect subsea boulders and other geo hazards to assist in derisking offshore installations such as wind farms and carbon capture facilities. These are new markets for us and ones that we continue to think bring great promise as we're pursuing other opportunities for these systems.

It also is a growing opportunity for MIND to provide seismic streamer repair services, not only for SeaLink streamers, but also for products manufactured by others.

We continue to see traction for our spectral AI software suite through our collaboration agreement with General Oceans. This software is now being used by 2 NATO Navies with several other promising prospects. While the contribution has been minimal to date, we are optimistic about its prospects help to find further applications for this technology.

Now I'll let Mark walk you through our first quarter financials and results in a bit more detail.

[Mark Cox, executive]

Thanks, Rob, and good morning, everyone. Consistent with the past several calls, I would like to remind everyone 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 decline. They include only our ongoing business.

As Rob mentioned earlier, revenues from Marine Technology product sales totaled approximately $9.7 million in the quarter, which was down about 9% from approximately $10.6 million in the same period a year ago. The shifting of deliveries and the impact of that on quarterly revenues is just a fact of life for our business. We continue to believe the underlying strength we're seeing in all our key markets, and the significant customer demand driving our robust backlog positions us well for sustained high-level revenue in the coming quarters.

First quarter gross profit was approximately $4.2 million, which was down approximately 7% when compared to the first quarter of last year. However, gross profit margin was approximately 44% for the quarter, which is an increase from the same period a year ago. Gross profit margin improved despite lower revenues in the quarter as a result of price increases implemented in fiscal 2024 and increased production efficiencies.

Our general and administrative expenses were approximately $2.8 million for the first quarter of fiscal 2025, which was down sequentially from $3 million and more notably, down 17% from $3.3 million in the first quarter of last year.

As we mentioned on our last call, the sale of Klein is allowing us to streamline our operations and thereby reduce some costs. In addition to the client related savings in the fourth quarter that were masked by typically higher year-end G&A spending, we realized further cost savings in the first quarter associated with reduced corporate expenses attributable to Klein. Our research and development expense for the first quarter was $462,000. This was down both sequentially and compared to the prior year period. These costs are largely directed towards the development of our next-generation streamer system and continued development of our spectral AI software suite. Operating income for the first quarter was $730,000 compared to operating income of $419,000 in the first quarter fiscal 2024.

Our first quarter adjusted EBITDA was $1.5 million compared to $874,000 in the first quarter a year ago. Net income for the first quarter was $954,000, which was an improvement of approximately $1.1 million from the net loss of $124,000 in the first quarter of fiscal 2024. Net income in the quarter was positively impacted by the sale of approximately $469,000 of lease pool equipment. As Rob mentioned, we're pleased to have achieved another quarter of profitability and we hope to continue building on this momentum in future periods.

As of April 30, 2024, we had working capital of approximately $19.3 million and $924,000 of cash on hand. As expected, liquidity was impacted during the quarter due to MIND's operational requirements related to acquiring inventory and executing on our backlog of orders. Balance sheet remains strong following the sale of Klein last August, which enabled the company to eliminate its outstanding debt. And as of today, mine remains debt-free. I'll now pass it back over to Rob for some concluding comments.

[Robert Capps, executive]

Okay. Thanks, Mark. MIND continues to benefit from the transformation we embarked on several years ago. Most recently, we've been able to refocus our attention with the sale of Klein last year. We believe the company is better positioned today than at any other time in its history. Our focused approach and streamline operations have given us a lean operating structure and improve our ability to control cost. As a result, our first quarter built on our positive momentum from recent periods to deliver favorable results that were in line with our expectations.

Our goal of maintaining positive adjusted EBITDA and profitability throughout fiscal 2025 is well within our sites. Market conditions remain favorable, and we believe there are still opportunities for our Seamap unit and for our other initiatives. We've developed valuable partnerships and customer relationships that enabled us to build a strong backlog and our marine technology products continue to penetrate a variety of industries and markets. I believe this 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 our significant customer engagement and the orders received to date are indications of the market adoption of our product lines. While we were pleased with the results for the first quarter, we believe MIND is poised to capitalize on additional opportunities and deliver improved results in the coming quarters. Despite these positive results and our favorable outlook as expected, during the quarter, we [ realised ] liquidity to acquire inventory and execute on our backlog. This is a prime example of what we've discussed in research about our need to retain capital from operations, execute our book of business and deliver orders.

This further supports our rationale behind the continued deferral of dividends on our preferred stock as well as our decision not to repay the deferred dividends [ in ] arrears. Although our operations are much improved, they do not support the required growth in working capital and the payment of preferred dividends. As a result, and serve as a final reminder, we have scheduled a virtual special meeting of preferred stockholders for June 13, to approve an amendment that would allow for the conversion of each share of preferred stock into 3.9 shares of common stock. However, in order to comply with the proxy rules, we will not make further comments regarding this beyond those contained in press releases issued on May 8 and May 29. Additionally, we will not entertain any questions regarding this in the Q&A session.

As usual, I'd like to remind everyone that you should expect some fluctuations in our revenue from quarter-to-quarter as we saw this quarter. As we've seen many times in recent years, there will likely be quarterly revenue variation due to a variety of challenges and unforeseen circumstances for simple customer delivery requirements. We continue to maintain our belief that the general trend [ will ] won a sustainably higher level revenue in fiscal 2025 and beyond.

Looking forward, we are cautiously optimistic that barring any unexpected challenges or unforeseen circumstances, we should be able to deliver additional improvements to our results in the upcoming quarters. Our current visibility, healthy customer engagement, strong backlog and favorable macro tailwinds give us confidence we will see revenue growth, continued positive adjusted EBITDA in the coming quarters, which we anticipate colliding in another profitable year for MIND.

We have a differentiated and market-leading suite of products. We look forward to capitalize on customer demand to deliver increased share value in the future periods. And with that, operator, I think we can open the call up for some questions.

[Operator]

[Operator Instructions]

Our first question comes from the line of Tyson Bauer with KC Capital.

[Tyson Bauer, analyst]

You mentioned a couple of times and I repeated it that you're looking to build off Q1 results as you go forward, given your backlog, your cost containments, all that starts to play through as we go forward. Is that to imply that Q1 is kind of the foundation then for the next 3 quarters. And if that is the case, if there were to be 8 million shares outstanding on a pro forma basis, and you did a $0.12 in the quarter, should we look at that as the baseline then, that will work our way forward?

[Robert Capps, executive]

Let me touch it 1 at a time. So as far as the revenue level, we do think we'll see improvements later in the year. Obviously, based on the backlog, we have good visibility as to what we have to deliver, it's just a function of when people want it, when we can get it built, when key components come in, things like that impact actual delivery schedules. So that's [indiscernible] ups and downs. So I would expect that the revenue for the year would be at a higher level than if you were to annualize the first quarter, if that I think answers your question...

[Tyson Bauer, analyst]

We might have variability, but overall, you're going to average higher quarterly levels.

[Robert Capps, executive]

I think that's fair to say. But again, the could be variability. Again, you have a $4 million order and it slips a month or so, it has an impact. But generally speaking, I would agree with that. As far as EPS, I'm not sure I want to get in the game of trying to project earnings per share. But I think that kind of gives you a base for where we think revenues are, I think our cost structure has been demonstrating to come in line. I think as we see higher revenues, just naturally, we'll see some improvement in margin, not dramatically, but some additional absorption of overhead, but not dramatic impact there. Does that get at what you're asking?

[Tyson Bauer, analyst]

Do you think you're going to comment at all on EPS, given your for everybody. That's 8 million shares outstanding if this all goes through. And this quarter would have been $0.12. Just simple math. Working capital relief, you have the increase in inventory and accounts receivable.

Give us a little flavor of that cash cycle trying to tighten that up because if you keep your accounts payable pretty tight, and you have done so through the previous periods. Should we start to see some relief? Or are these going to be kind of those balances as we go forward that we won't have a negative impact. We just will see levels kind of in the range that they were at the end of this quarter.

[Robert Capps, executive]

Yes. So I think we'll see some relief. We'll start to generate some operating cash out of this as we go through. Obviously, we've done some things ahead of time, knowing we have the backlog, having to acquire product, make some prepayments in some cases, things like that. But if we continue to grow as we think we will, that is going to continue to absorb some of that working capital. So I think we'll see some relief, some turnaround, but I wouldn't think it's going to be dramatic at this point, at least not in the near term.

[Tyson Bauer, analyst]

Okay. But self-sustaining where you're not going to be require capital going forward, you have now for what you know is sufficient to maintain your needs internally.

[Robert Capps, executive]

Yes, absent some growth spurt right. So that's right.

[Tyson Bauer, analyst]

Okay. You talked a lot about order flow, you're very optimistic going forward. Give us some characteristics on are these mainly repeat customers? Are the sizes of these POs larger than what you've experienced before and the lead times? Are you getting an order for something that may be a year out?

[Robert Capps, executive]

Yes. So some repeat customers, some new customers, so a little bit of both. Especially as we kind of expand our streamer offerings, the [indiscernible], we're seeing some new customers there. Order size, some bigger, some smaller. I mean we see from a couple of hundred thousand dollars to several million dollars. So it just depends Tyson, it's really all over the place. I'd say as far as orders in hand, once we get a PO, it's not going to be about a year.

Typically, as something that's out $0.06 or more is not unusual at all. But we do have good visibility, I think, on other potential things that are going out in that 1-year period. I'm not saying we have POs in hand, but again, we have discussions going on. We know that customers have some plans but they actually haven't placed your order yet.

[Tyson Bauer, analyst]

Okay. Are you willing to, if not in actual, absolute numbers, just kind of give us a sense or halfway through this quarter, how the POs, backlog kind of cash situation. Are you feeling more optimistic today than you were 45 days ago?

[Robert Capps, executive]

Well, I don't want to get specific for sure. I think things going as we anticipated. So I'm happy to hear things on right now.

[Tyson Bauer, analyst]

Okay. And last [ one ] for me before others get on. A significant amount of loss carryforwards that a U.S. domiciled that you're really not able to use depending on deliveries take place and you add a 20% tax rate this time. Are there avenues or have you been advised on how to try ties those loss carryforwards in the U.S. to take advantage of those?

[Robert Capps, executive]

Yes. So we are looking at things to do there. I'll tell you, the monetizing NOLs is a difficult having tried to do that in the past. It's hard to do. The IRS on purpose has limited your ability to do that. But we are trying to explore ways to be more -- a bit more tax efficient because, as you know, we are paying taxes in jurisdictions right now.

[Tyson Bauer, analyst]

Okay. And most of your cash is held overseas, correct?

[Robert Capps, executive]

Well, it's generated overseas, and it's suited there over -- back from time to time. That's U.S. dollars so...

[Operator]

Our next question comes from the line of Ross Taylor with ARS Investment Partners.

[Ross Taylor, analyst]

Can you kind of walk through a couple of things. I mean 1 is the cost structure, which has come down, the SG&A structure has come down some, but I would think it has more room to come down given the shift in the business. So could you walk through the ability to bring that cost structure [ down ]?

[Robert Capps, executive]

Yes. So I think you're right across -- Ross, sorry. There is some ability to do more obviously, as we've got it's allowed us to be a little more lean at the corporate structure at the corporate level.

And I think there are some more things we can do there, still be more focused. And I think there's still some benefits that haven't worked through the income segment yet. So I think we'll see some continued improvement there. But we are a public company, even though we're small. So that creates some challenges. There's a point where you just can't go below at some point.

[Ross Taylor, analyst]

What are your public company costs, do you think? Would it be safe to say that -- are they in the $1 million annual range?

[Robert Capps, executive]

So they're more than that.

[Ross Taylor, analyst]

More than that. So going back to Tyson's 8 million share math, we're talking about public company costs are probably more than $0.12 a share annually at this stage, which would go away at some -- if you end up merging with another business.

[Robert Capps, executive]

Yes -- that's the math.

[Ross Taylor, analyst]

Yes. Okay. Let's talk about the amount of time it takes to convert inventories to cash. You've been carrying some pretty high levels of inventory. In some cases, it's because from prior comments you've made, it appears that you are -- you want to make sure you have key components so that when you get orders, you can build them out. What should we expect that inventory conversion time horizon to be?

[Robert Capps, executive]

Yes, that's complicated now for the reasons you just mentioned -- because lead times have become an issue for many components or many things that we utilize. [indiscernible] items remind if historically had a 90-day lead time, we might see now 180-day lead time. So that means we have to be more aggressive in buying inventory. And that's driven part of the increase -- so it's really to be specific at this point as to how quick we turn that. I think we're at a point where we don't anticipate having to increase that level beyond where we are now, again, unless we see a growth spurt. So we would expect to start to see that come down somewhat. But that's a tough 1 to predict right now. And that's something we have to manage early on a daily basis almost.

[Ross Taylor, analyst]

When you price new business, how do you protect yourself against those component -- the cost of those components that might [indiscernible] points?

[Robert Capps, executive]

Yes. So from a pricing standpoint, buying in advance is 1 way you do that. So you know what you can buy, probably is to commit to buying. So that's 1 thing. We obviously try to adjust pricing on an annual basis to our customers, which we've been successful in doing. So it's just a combination of those things.

[Ross Taylor, analyst]

Okay. So can you talk -- you mentioned the fact that you have some NATO business really not adding a great deal at this stage. Can you talk about the market opportunity there? And what your role or how you get compensated to that business? Is it a royalty setup -- go ahead.

[Robert Capps, executive]

So yes, that's our [indiscernible] AI software suite, which right now is marketed through General Oceans through Klein. And so we have a license arrangement. So it's a recurring license fee, an annual license fee. So it builds on itself.

So that's 1 where there's the software is developed. There is some maintenance of the software, but the costs are relatively minor in comparison. So that's 1 where I think we have opportunity to build that. Is that going to be a $20 million year business for us, no. Could it be a few million dollars, yes. And that's a nice business. And frankly, we think also we could take that same basic technology and apply it to other areas, other symptoms, and therefore, expand that. But right now, we're trying to move slowly and get it established get a revenue stream coming in and so he kind of pay for itself.

[Ross Taylor, analyst]

And would -- should we expect as that growth that it generates kind of traditional software margins, operating margins?

[Robert Capps, executive]

I think, yes. Yes. Yes. And that's what I like it so much, both from a margin standpoint and from a valuation standpoint, obviously.

[Ross Taylor, analyst]

Okay. Are you seeing any sectors meaningfully outperform your expectations here or meaningfully underperform them? And if so, what do you think is driving the out or underperformance.

[Robert Capps, executive]

Well, certainly, we're seeing our traditional markets performed very well. Energy-related is performing very well right now. We are starting to see the alternative energy markets, survey applications, alternative energy markets, start to perform very well. So I really don't see anything underperforming at this point.

[Ross Taylor, analyst]

Okay. Great. Real quick. So we got a vote coming up on Wednesday. I know you won't comment on it. What I will say is that we appreciate the fact that you reached out and listened to your shareholders, your preferred shareholders this time. And we, for one, I can't comment on anyone else, but we are supportive of this transaction at this stage, this ratio. So thank you very much.

[Robert Capps, executive]

Appreciate that, Ross.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back to Mr. Caps for closing comments.

[Robert Capps, executive]

Just like to thank everyone for joining us this morning and look forward to talking to you again in a few months for our second quarter results. Thanks.

[Operator]

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