MIND Technology, Inc. (NASDAQ:MIND) Q2 2024 Earnings Call Transcript September 14, 2023

Operator: Greetings, and welcome to the MIND Technology Second Quarter Fiscal 2024 Conference Call. At this time, all members are in a listen-only mode. A short question-and-answer session will comply with the formal presentation. [Operator Instructions] As a reminder, this convention is being recorded. It’s now my pleasure to introduce your host, Ken Dennard. Thank you. You might start.

Ken Dennard: Thank you, operator. Good morning and welcome to the MIND Technology Fiscal 2024 second quarter earnings convention name. We admire you becoming a member of us at present. With me are Rob Capps, President and Chief Executive Officer, and Mark Cox, Vice President and Chief Financial Officer. Before I flip the decision over to Rob, I’ve a number of gadgets to cowl. If you’d wish to hearken to a replay of at present’s name, it is going to be out there for 90 days by way of webcast by going to the Investor Relations part of the corporate’s web site at mind-technology.com or by way of telephonic recorded on the spot replay till September 21. Information on easy methods to entry these replay options was offered in yesterday’s earnings launch. Information on this name speaks solely as of at present, Thursday, September 14, 2023, and due to this fact, you’re suggested that time-sensitive info might not be correct on the time of any replay listening or transcript studying.

Photo by Shridhar Gupta on Unsplash

Before we start, let me remind you that sure statements made by administration throughout this name might represent forward-looking statements throughout the which means of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based mostly on administration’s present expectations and embody identified and unknown dangers, uncertainties and different elements, a lot of which the corporate is unable to foretell or management, that will trigger the corporate’s precise future outcomes or efficiency to materially differ from any future outcomes or efficiency expressed or implied by these statements. These dangers and uncertainties embody the danger elements disclosed by the corporate once in a while in its SEC filings, together with its annual report on Form 10-Okay for the yr ended January 31, 2023.

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Furthermore, as we begin this name, please additionally consult with the assertion relating to forward-looking statements integrated in our information launch issued yesterday, and please observe that the contents of our convention name this morning are lined by these statements. And now, with that behind me, I’d like to show the decision over to Rob Capps. Rob?

Rob Capps: Okay. Thanks, Ken. Now as I consider you all know, in August, we took a major step with the sale of our Klein unit. Today, I’d like to start by discussing that transaction and the rationale for it earlier than discussing our second quarter 2024 outcomes, in addition to our present view of market situations. Mark will then present a extra detailed replace on our financials. I’ll then wrap issues up with some remarks about our outlook. With the strengthening outlook for our Seamap unit, that we’ll focus on additional in a second, we thought it was essential to streamline MIND’s operations and tackle the monetary necessities related to our rising enterprise. When the chance to promote Klein arose, we noticed a chance to realize each these goals.

Our Klein enterprise unit was chargeable for roughly $3.1 million in income throughout the first six months of this fiscal yr, however contributed an working lack of about $911,000. On a professional forma foundation, had the sale taken place initially of the yr, MIND would have reported a constructive pretax earnings versus the $1.2 million loss we reported. This additional demonstrates the premise for our resolution to half methods with the Klein enterprise unit and focus our consideration on different operations. As we have beforehand disclosed, consideration from the sale was $11.5 million in money. We used a portion of those proceeds to repay the $3.75 million time period mortgage from earlier this yr. After transaction price and the mortgage repayments, the online proceeds out there to us amounted to about $7.3 million.

An additional benefit from the sale is the licensing association and collaboration settlement with the client, General Oceans. This offers an essential alternative to comprehend worth from our Spectral Ai software program suite, which MIND retains. Through this association, we hope to comprehend recurring licensing income whereas persevering with to reinforce Spectral Ai imported to functions past [indiscernible]. Our second quarter outcomes got here in roughly in keeping with our expectations. Revenues dropped off a bit sequentially because of the scheduling of deliveries. That was largely anticipated. This exercise just isn’t uncommon, and I’ll remind you that revenues usually fluctuate in our enterprise once in a while for a wide range of causes which are usually out of our management. We proceed to consider that MIND is exceptionally nicely positioned to capitalize on the favorable market dynamics to realize a sustainable top-line enchancment long run.

As of July 31, our backlog of agency orders for Seamap stood at $17 million. Subsequent to quarter finish, we acquired further orders totaling roughly $5.4 million. And we even have confidence that in coming weeks, we’ll be able to announce further sizable orders that we really feel are imminent. These booked and pending orders contain a wide range of merchandise, together with GunLink Source controllers, BuoyLink positioning programs and SeaHyperlink streamer programs. We consider this continued constructive backlog pattern is indicative of the favorable market situations and the differentiation of our Seamap product traces. We stay assured that this momentum will carry all through the rest of our fiscal 2024 and past. We consider the present market atmosphere is advantageous for MIND.

Each of our three key markets, exploration, protection and survey, are loaded with alternative. With our operations now streamlined and targeted, we’re higher positioned than ever earlier than to deploy our product traces into a wide range of finish markets, and our crew continues to develop new and revolutionary methods to adapt and implement our applied sciences to fulfill the wants of our prospects. In addition to conventional energy-related alternatives, we’re seeing new different functions for our Seamap applied sciences, together with offshore wind farms and different inexperienced vitality initiatives. There’s additionally a rising alternative for MIND to supply seismic streamer restore providers, not just for SeaHyperlink streamers, but in addition for merchandise manufactured by others. Within the maritime protection and safety market, we proceed to consider that our Sea Serpent passive array system, which is derived from our commercially developed SeaHyperlink system, is a major and economical answer for a wide range of demanding functions throughout the area.

We intend to proceed leveraging the favorable macroeconomic traits, the differentiation and flexibility of our product traces, and a sustained buyer demand and curiosity that we’re seeing to drive sturdy order exercise and progress in our ebook of enterprise within the close to time period. Now, I do know a lot of you have an interest in our plans relating to dividends on our most well-liked inventory. While our liquidity place is far improved, we’re persevering with to guage the working capital necessities related to our rising backlog of enterprise. Accordingly, at this level, now we have not decided relating to accrued or ongoing dividends. We will, after all, replace you as soon as any selections are made. As a lot of you’re conscious, we held our Annual Shareholder Meeting on August 30.

Included on the agenda was the proposal for the approval of a reverse inventory break up that may allow us to regain compliance with the NASDAQ itemizing requirements. Our shareholders authorized this proposal. This was an essential and mandatory first step, and NASDAQ has granted us till November 15 to regain compliance with a minimal [mid-price] (ph) requirement. We’re now going by way of the inner mechanics of implementing the reverse break up and can present an replace on the particular framework as issues evolve. Now, I’ll let Mark stroll you thru our second quarter monetary ends in a bit extra element earlier than I come again.

Mark Cox: Thanks, Rob, and good morning, everybody. As Rob talked about earlier, revenues from persevering with operations totaled roughly $8.8 million within the quarter, which was roughly in keeping with the revenues of $8.7 million in the identical interval a yr in the past. Our Seamap section delivered income of roughly $7.6 million throughout the quarter, which we consider is essentially indicative of the continued power that we’re seeing within the exploration and different vitality markets. Gross revenue throughout the second quarter was roughly $3.3 million, which was marginally down when in comparison with gross revenue of $3.5 million within the prior yr interval. This represents a gross revenue margin of 37% for the quarter, a 330 foundation level lower when in comparison with the identical interval a yr in the past.

Gross revenue margins for the Seamap section have been up roughly 300 foundation factors year-over-year, whereas present interval gross revenue margins within the Klein declined considerably from the prior yr interval. Decline in gross revenue margins for the Klein section was resulting from gross sales of higher-margin multi-beam sonar programs within the prior yr interval not recurring within the second quarter of fiscal 2024. Our common and administrative bills have been roughly $3.5 million for the second quarter, which have been down barely when in comparison with the $3.9 million from the primary quarter and $3.8 million for a similar interval a yr in the past. The enchancment over the prior yr interval is principally resulting from reductions in govt stage headcount in addition to different price administration initiatives that we have carried out.

Our analysis and growth expense for the second quarter was $842,000, which was up barely each sequentially and when in comparison with the yr in the past interval. Consistent with prior durations, these prices are largely directed in the direction of our strategic initiatives, together with artificial aperture sonar and passive sonar array. Operating loss for the second quarter was roughly $1.5 million, which was primarily in keeping with a lack of roughly $1.6 million within the second quarter of 2023. Our second quarter adjusted EBITDA was a lack of $687,000 in comparison with a lack of roughly $1 million within the second quarter final yr. As of July 31, 2023, we had working capital of roughly $13 million and money of $494,000. After factoring in web proceeds from the Klein sale in August, our liquidity place is considerably improved.

As Rob famous in his opening feedback, upon the closing of the Klein sale, we additionally repaid and eradicated our high-cost debt that we incurred earlier this yr, and MIND is as soon as once more debt-free. I’ll now cross it again over to Rob for some concluding feedback.

Rob Capps: Thanks, Mark. We’re extra excited than ever for the way forward for MIND know-how. We’ve taken the mandatory steps to streamline our operations, and as we sit right here at present, we’re a extra targeted and environment friendly firm. We suppose the alternatives for our Seamap unit are important. The coupling of favorable market situations and our differentiated and versatile product choices is a recipe for long-term success. We’re seeing better buyer curiosity and engagement and historic highs so as circulate, which contributes to our excessive expectations for significant and sustained progress. We’re assured that MIND is headed in the best course. We look ahead to constructing on the strong basis that we have constructed to this point. Our Seamap applied sciences proceed to achieve traction with prospects globally for a wide range of finish makes use of, and our crew has completed an amazing job adapting our applied sciences to fulfill the evolving wants of our prospects.

As we look ahead to the again half of the yr and into fiscal 2025, we intend to capitalize on this constructive momentum to drive enhancements in our financials. The expertise this quarter and have historically seen, there’ll possible be income variation between quarters resulting from a wide range of challenges and unexpected circumstances in addition to easy buyer supply necessities. With that stated, we do consider that the final pattern will likely be certainly one of elevated income. The favorable market traits, sturdy buyer curiosity and progress of our backlog continues to provide us confidence that sustainable greater stage income is achievable. We’ve labored exhausting and brought the mandatory steps to place MIND as a number one producer of differentiated marine know-how merchandise, and we’re enthusiastic about what the longer term holds.

As of at present, we’re debt free. We have a a lot improved stability sheet and liquidity place. We intend to proceed capitalizing on the favorable market situations, robust buyer curiosity and engagement and sturdy order circulate to realize improved outcomes, which we consider will generate significant shareholder worth going ahead. And with that, operator, we are able to now open the decision for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first query comes from the road of Tyson Bauer with KC Capital. Please proceed together with your query.

Tyson Bauer: Good morning, gents.

Rob Capps: Hey, Tyson.

Tyson Bauer: Do you occur to have, only a bookkeeping query proper off the bat, type of the money stability of the place you have been as of this morning or final evening?

Rob Capps: I imply, yeah. I’m undecided if I wish to discuss that particularly. But once more, for those who take a look at the place we have been on the finish of the quarter, $0.5 million or so, we have added $7 million or so from the gross sales, in order that’s going to provide you a way of magnitude.

Tyson Bauer: Okay. And then have you ever had money conversion? Obviously, you had some important accounts receivable with the decrease income, so I’m guessing simply that timetable of changing these receivables to money?

Rob Capps: Yeah. I imply that — we’ll definitely proceed to do this. But additionally keep in mind, now we have a big backlog that we’re beginning to construct, so there’s ongoing wants there as nicely. So it is a mixture of issues.

Tyson Bauer: Okay. On — if we take a look at the primary six months in Seamap, roughly $18 million. You’re speaking about some type of income progress as we go ahead. I’m guessing you are basing that off that $18 million for Seamap. That would indicate at the very least $36 million for the yr, you probably have any type of progress between $36 million and $40 million relying on cargo timings and another issues that may throw a monkey wrench into that. But as of proper now, is that type of the view that you’ve, is between $36 million to $40 million of income?

Rob Capps: Again, not eager to get too particular, however I believe once more, so far as a way of magnitude, you are headed in the best course. I believe the fascinating factor is now we have that historical past for the primary six months that I believe, extra importantly, for those who take a look at our backlog exercise, it offers us visibility for the stability of the yr and into subsequent yr as nicely, which is essential for many causes. But you talked about that the factor that now we have to remember is a lot of issues can occur that trigger a specific cargo or two to slip from a method or one other. So these — a few of these are sizable orders, a number of million {dollars}. So it solely takes one or two of these to have an effect. So simply everybody must preserve that in thoughts, however the common pattern just isn’t completely different from what you described.

Tyson Bauer: Okay. And the margins sometimes on Seamap, at the very least traditionally, have been nearer to, on the expansion facet, what, 50-plus-percent or 50% relying on what sort of capability utilization and how much — what number of you are really having the ability to produce and ship?

Rob Capps: Yeah. Maybe not fairly that. I’d say within the excessive 40s, simply type of the place we have seen issues traditionally. We have an affordable influx or throughput to the operation. Since we do have visibility going ahead, that offers us some alternatives, we expect, to be a bit extra aggressive in a few of our procurement actions in addition to in a few of our manufacturing operations, so we’re hopeful to have the ability to enhance that considerably. But it is actually been within the excessive 40s traditionally.

Tyson Bauer: And you may have been already beforehand speaking about $1 million discount in your company bills and your G&A bills even earlier than you probably did the Klein. Would anticipate some further financial savings out of that as we go ahead and no matter was allotted to Klein on these company. What are you anticipating now type of as a go ahead on these G&A bills? And then a follow-up, your R&D, was that primarily associated to Klein or what portion of that…

Rob Capps: Yeah, not fully. I inform — I’m going to defer a little bit bit right here. And after we file our 10-Q later at present, we’re together with some professional forma financials in that 10-Q, which I believe gives you some good visibility as to what the affect would have been. We alluded to it in our feedback at present, however I believe that gives you some sense. But primarily, the Klein R&D goes away, which is a good portion of our R&D. The direct Klein G&A goes away, and we additionally suppose there’s some ongoing issues we are able to do to proceed to streamline the operation. I have not fairly quantified these but. That’s one thing we’re trying to do to simply make issues a bit extra environment friendly. But once more, take a look at the professional formas within the 10-Q. I believe that gives you some good info.

Tyson Bauer: And your curiosity expense goes away additionally?

Rob Capps: Yeah. Absolutely, completely. Yeah.

Tyson Bauer: And I assume what I’m main you to is, and simply doing the again of the serviette sort of numbers is, ought to your administrators select to pay ahead most well-liked dividends, the monetary wherewithal is there, it might be tight initially, however clearly, you may have the money stability. You may have the monetary wherewithal on ongoing monetary operations to pay that for those who resolve to take action?

Rob Capps: Yeah. Again, we’re simply analyzing the general scenario and attempting to know how we are able to stabilize the continued overhead price, but in addition what are the working capital necessities going to be to verify we do not discover ourselves able like we have been a yr in the past and — for a number of months, and having to essentially get by on a shoestring. That’s not what we wish to do. That hurts the operation. So sure issues are a lot improved. Again, you are going to see from the professional formas what the numbers appear to be, so you may draw your individual conclusions. We’re simply going to take all that into consideration after we make our selections.

Tyson Bauer: Okay. And that call possible we’ll know in early October, which is the time that it’s a must to resolve whether or not to defer or to at the very least make that October cost on the popular?

Rob Capps: Yeah, that is appropriate. That’s proper.

Tyson Bauer: Okay. And actually, off the desk proper now could be the accrued quantity as a result of we’re not in that place to handle that on the time being. So the choice is de facto whether or not or not we wish to pay what goes ahead and being present on the ahead, after which sooner or later sooner or later, decide on what the accrued — whether or not or not you may again pay?

Rob Capps: Again, I do not wish to touch upon that, Tyson. We’re — it is all on the desk proper now. We’re simply going to have a look at the general scenario.

Tyson Bauer: Okay. In your 10-Okay relating to the reverse break up, it seems that despite the fact that it’s till November 15, you’ll decide or a break up, if it have been to happen, would happen on the top of October, which the implication is that if it’s a must to have 10 days above $1, that must happen throughout the subsequent 4 weeks. So…

Rob Capps: Yeah. You’re proper about that.

Tyson Bauer: Scenario is that now we have a reverse break up, one for 10, simply throwing that on the market as a result of that was within the proxy, will happen or would possible happen on the finish of October?

Rob Capps: That just isn’t an unreasonable assumption.

Tyson Bauer: Okay. Oil, $90. Heating oil [dropped] (ph) 40% since July. A variety of tailwinds are constructing that may be favorable for Seamap. And simply to provide the listeners a little bit sense, when your main competitor left the market a yr in the past, a number of these selections on whether or not or not you get a contract or not is whether or not the final word buyer simply needs to go forward and place that order. It’s not likely a aggressive scenario the place you are going in opposition to anyone else as we have seen in years previous.

Rob Capps: Yeah. As it pertains to supply controllers, that’s positively the case. We have been just about the one sport on the town. We do have some competitors for the positioning programs, BuoyLink, and we do have some competitors for the streamer programs, however we’re targeted extra on the excessive decision, three-dimensional functions used for survey functions greater than deepwater exploration. So we do not go head-to-head with the deepwater streamer programs. So we do have some competitors there, but it surely’s fairly skinny, it is honest to say.

Tyson Bauer: Okay. And your self and Mark aren’t on the Board, appropriate?

Rob Capps: I’m on the Board. Mark just isn’t.

Tyson Bauer: You’re on the Board. The Board goes to ask in your suggestion, being the CEO, and the CFO’s suggestion on outlook and financials. Are you keen to share what you’d advocate? Even although that — there’s just one cog within the resolution that the Board will make in the end with regard to the popular and going ahead?

Rob Capps: Yeah. No, I do not suppose we will touch upon that. The Board as a complete will make that call, so it would not be applicable for me to touch upon that.

Tyson Bauer: Okay. Thank you, gents.

Rob Capps: You wager.

Operator: Thank you. Our subsequent query comes from the road of Ross Taylor with ARS Investment Partners. Please proceed together with your query.

Ross Taylor: Always exhausting to comply with Tyson since he asks all the great elementary questions. So Rob, I’m simply going to — I’m going to voice some ideas right here. The most well-liked is definitely fairly rattling good paper. In truth, it is actually good paper for you guys. And there is no approach you may go into {the marketplace}. You paid off a time period mortgage that was, what, [12.9%], I believe it was? This most well-liked is nearly 400 bps beneath that. The truth that you just guys and the Board may select to not pay that off, each time you try this, I imply as an fairness holder, I’ve sat right here eternally ready for you guys to get it proper. And you are near getting it proper, and I’ve this sense you are concerning the snatch defeat from victory as a result of what if I’m a most well-liked holder and I get two administrators, the very first thing I’m telling my administrators to do, rent a banker.

And there is no approach, even together with your plans and your confidence, there may be that hesitancy, you hear it in your feedback, that makes it inconceivable for this Board to say no to any deal that that banker discovered that may make the popular holders entire and the fairness holders stroll away with subsequent to nothing. And so it is essential. Let’s get that paper off the again of the widespread holders, it is simply — it is simple. It’s — you may’t borrow at 9%. And in actual fact, you need to get to get it going, and that paper is best than going to the financial institution. I imply finally, you’ll go to the financial institution and doubtless borrowing them excessive single digits at this level on this atmosphere. And it frustrates me, and I simply — I sense that the widespread holder is simply going to be requested to carry a bag and you are going to do a reverse break up, get the inventory above $1.

But in actuality, that $8 million, $9 million in worth that is hooked up to the widespread proper now could be mainly there on the hope that you just guys get this factor labored out with the popular holders. So you’re on the Board, and I’ve identified you for a very long time, and I do know you are a good particular person and a wise particular person, and I am unable to consider that you just and this Board are going to let this case go the place you defer the cost once more as a result of, as I stated, I’m assured Tyson is a great man, and I’m positive a few of these most well-liked holders speak to Tyson. And I’m positive they’re fairly assured that this firm is price someplace between $26 million and $50 million or extra. And if it is — in the event that they promote it at $50 million, the popular holders stroll away with all the pieces, and you’ll’t let that occur.

Can you?

Rob Capps: Ross, I hear your feedback and I take these into consideration. So I hear you.

Ross Taylor: Yeah. Don’t — I imply, I received to be trustworthy. I do not wish to come again to a name having supported you guys for this lengthy and have you ever guys mainly have, for [want of $1 million] (ph) paid to the popular holders, mainly might inform the fairness holders that they do not have an asset. I’ve waited too lengthy. This has not been a profitable funding for me, however we are able to nonetheless snatch victory from the jaws of [ignominity] (ph). So let’s do it.

Rob Capps: Okay. I admire it, Ross. Thanks. I actually admire your feedback.

Ross Taylor: Thank you, sir.

Rob Capps: You wager.

Operator: Thank you. Ladies and gents, that concludes our question-and-answer session. I’ll flip the ground again to Mr. Capps for any ultimate feedback.

Rob Capps: Okay. Thank you, Melissa. Thanks, everybody, for becoming a member of us at present. I look ahead to speaking to you on the finish of our subsequent quarter. So everybody, have a very good day. Thank you.

Operator: Thank you. This concludes at present’s convention name. You might disconnect your traces right now. Thank you in your participation.