Mind Technology Inc (MIND) 2025 Q2 法說會逐字稿

Greetings. Welcome to MIND Technology's fiscal 2025 second-quarter earnings conference call. (Operator Instructions)

Please note this conference is being recorded. I will now turn the conference over to Zach Vaughan, thank you. You may begin .

Thank you, operator. Good morning, and welcome to the MIND Technology's fiscal 2025 second-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 items to cover. If you would like to listen to a replay of today's call. It will be available for 90 days via webcast by going to the Investor Relations section of the company's website at mind-technology.com or via recorded instant replay until September 19.

Information on how to access the replay was provided in yesterday's earnings release. The information reported on this call speaks only as of today, Thursday, September 12, 2024. 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, 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 this morning are covered by these statements.

Now I would like to turn the call over to Rob Capps.

Hey, thanks, Zach, and thanks for all of you joining us today. First of all, I want to welcome all of our new common stockholders for the conversion of our preferred stock and common stock last week MIND, now has a substantial new group of common stockholders are many, if not most of the MIND as a new company. This new capital structure that are encouraging business environment provide MIND with important opportunities say, I'll discuss some highlights from the quarter. Are they provide a more detailed update on our financials, and I'll return to wrap things up with some remarks about our outlook.

MIND delivered positive results in the second-quarter that were in line with our expectations and further demonstrated the progress we've made on several fronts. We continue to operate efficiently and actively manage costs.

We generated positive cash flow from operations in the quarter, which helped improve further improve liquidity. Our ability to build on the momentum we've generated in recent periods and execute has enabled by to deliver another quarter of positive adjusted EBITDA and profitability.

We remain well positioned to achieve profitability and favorable results in future periods. So we maintain our belief. The MIND is strategically positioned for both near and long-term growth. The whole quality did not directly impact second quarter results.

The approval of our preferred stock proposal and the resulting conversion of all preferred stock into common stock was a very important development. On the conversion, we issued approximately 6.6 million shares of common stock now have about 8 million shares outstanding.

All outstanding preferred stock, along with associated accrued dividend declared dividends has been retired. Mark will touch on the accounting for this conversion, which you'll see in the third quarter, we entered the third quarter with a strong backlog of approximately $26 million. And of that, some of you have been concerned that there's not been more announcements of new orders recently, although could order flow is often spread. It's not uncommon to see positive order activity throughout the year. Especially during the summer.

The backlog at the end of quarter was down sequentially, however, was more than 50% higher than at the same time last year, which is quite high by historical standards. We don't announce each and every order we received final there and more than $6 million in orders and then have been received subsequent to July 31,for that we believe are imminent and those are not included in the reported backlog.

Beyond that, we have an active pipeline of pending orders and prospects, and it's well in excess of our backlog received orders. We believe this robust backlog and many of the opportunities we are pursuing bode well for favorable future financial results.

As always, the case, timing of certain orders is subject to variability due to any number of challenges unforeseen circumstances for customer delivery requirements, organic source controllers, we like positioning systems and SeaLink streamer systems are all contributing to our strong backlog.

We currently have a number of pending orders across these product lines. I'm confident that that type of macro environment, our narrowed focus, strong customer relationships, ever-increasing capabilities and valued partnerships.

We'll continue to see [media] MIND as the partner of choice for companies looking to acquire high-quality and versatile ring technology products.

Our Marine Technology Products revenues for the second quarter of fiscal 2025 were $2 million. Our ability to grow revenue both sequentially and year over year demonstrates the strength in customer engagement and order flow, favorable macro tailwinds and the emphasis we put on execution and efficiency.

We also continue to take steps to improve our cost structure, which has enhanced our profitability in recent quarters. That's always important to mention that while supply chain issues are much improved, they're still with us to varying degrees and could impact results in future periods.

These challenges are simply component of new business. We will almost certainly going to counter them again in the future.

Speaking about some of these challenges we've built inventory in recent months to accommodate pending and upcoming orders. Additionally, as we've noted the magnitude of our backlog and expected orders does give us better visibility and therefore a better ability to manage our procurement processes and accrete margin.

We continue to believe that the current market environment is advantageous MIND, our key markets remain loaded with opportunity. We're seeing an uptick in customer inquiries and RFQs as we come out of the summer months in addition to now operating a more streamlined and focused suite of products. Team continues to develop new and innovative ways to adapt our technologies to meet the evolving needs of our customers.

Recent sales and inquiries regarding our ultra high-resolution SeaLink streamer systems are good example of this. I'm confident that our differentiated approach and best-in-class suite of products, we'll continue to give us the competitive advantage to address the growing demand we're seeing with them and bring technology industry.

Our repair activities, both for our own products as well as third party products continue to develop look promising for the future to continue to see traction for our spectrum, a software suite through our collaboration agreement with General oceans. We believe there are a number of promising prospects. Recent customer feedback from this software has been positive, and we hope to find further applications for this technology in the future.

Now I'll let Mark speak to the second quarter financial results a little bit more detail.

Thanks, Rob, and good morning, everyone. But 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 decline. They include only our ongoing business.

As Rob mentioned earlier, revenues from marine technology product sales totaled $10 million in the quarter, which was up about 32% from approximately $7.6 million in the same period a year ago. 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.

Second quarter gross profit was approximately $4.8 million, which was up approximately 62% when compared to the second quarter of last year. Gross profit margin, which was approximately 48% for the quarter also increased approximately 22% when compared to the same quarter a year ago. This margin improvement stemmed from increased manufacturing activity that resulted in greater overhead absorption margins also benefited from the price increases that were implemented in 2024, as well as greater production efficiencies throughout the business.

Our general and administrative expenses were $2.8 million for the second quarter of fiscal 2025, which was flat sequentially and down slightly from $2.9 million in the second-quarter of last year. We also expect additional reductions in general and administrative expenses in the third quarter as we continue to streamline overhead costs following the sale of Klein.

As we've mentioned on previous calls, the sale of Klein has allowed us to streamline our operations and thereby reduce some costs, most notably related to corporate expenses attributable to the support of clients.

I should note that our general and administrative costs do not include incremental third-party costs related to the preferred stock proposal and resulting conversion of preferred stock into common stock. I'll touch on the accounting for that in a moment.

Our research and development expense for the second quarter was $328,000. This was down both sequentially and compared to the prior year period. These costs are largely directed toward the development of our next-generation streamer system and continued development of our spectral AI software suite.

Operating income for the second quarter was approximately $1.4 million compared to an operating loss of $767,000 in the second quarter for fiscal 2024, our second quarter adjusted EBITDA was approximately $1.8 million compared to an adjusted EBITDA loss of $120,000 in the second quarter a year ago.

Net income for the second quarter was $798,000, which was an improvement of approximately $1.6 million from the net loss of $758,000 in the second quarter of fiscal 2024. As Rob mentioned, we're pleased to have achieved another quarter of profitability, and we hope to continue building on this momentum in the future periods.

As of July 31, 2024, we had working capital of approximately $20.3 million and $1.9 million of cash on hand as expected during the quarter, liquidity continued to be impacted by MIND's operational requirements related to acquiring inventory and executing on our backlog of orders.

However, we did generate approximately $1 million of cash flow from operations in the second quarter the balance sheet remains strong. As of today, MIND remains debt-free. Additionally, after the preferred stock conversion earlier this month, MIND now maintains a clean capital structure and has good flexibility from which to enhance stockholder value.

As Rob mentioned, the conversion of the preferred stock is not reflected in our second quarter results, in the third quarter financials, we will reflect this transaction we expect to record the issuance of approximately 6.6 million new shares of common stock at the then current market value of the common stock unless associated transaction costs such as legal fees and solicitation costs.

The carrying value of the preferred stock will be eliminated the excess of the carrying value of the preferred stock over the recorded value of the new common stock, which we currently estimate to be approximately $15 million will be credited directly to retained earnings. This treatment was described in the proxy statement provided to preferred stockholders associated with the approval of the proposal.

I'll now pass it back over to Rob for some concluding comments.

Okay. Thanks, Mark. MIND continues to benefit from the positive momentum we've generated in recent periods actually sustained higher level revenue reflects that we're seeing strong customer interest and demand across our products in that product line. Our focused approach and streamlined operations continued to positively impact our results.

We maintain a lean operating structure to continue to manage costs to improve margins and enhance our bottom line. We fully expect to achieve positive adjusted EBITDA and profitability throughout fiscal 2025. We remain encouraged by the notable tailwinds and significant opportunities for our Seamap unit and our other initiatives in this market, to develop valuable partnerships and customer relationships that have enabled us to build a strong backlog. They continue to drive new orders.

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 pipeline that have received and pending orders and other prospects are reflective of the significant demand and market adoption of our product lines. While we're pleased with our results for the second quarter, we believe MIND is poised to capitalize on additional opportunities and deliver improved results in the coming quarters.

As usual, I want to remind everyone that fluctuations in revenue from quarter to quarter are bound to occur at some point in the future as they have at times in the past, this distributor revenue variation could result from any number of different challenges that present circumstances for simple customer delivery requirements.

We continue to maintain our belief that the general trend will be one that sustainably higher level of revenue throughout the remainder of fiscal 2025 and beyond. Conversion of preferred stock to common stock is another important element that, in my opinion, provides a great deal of flexibility in pursuing these opportunities looking forward and barring any unexpected challenges or unforeseen circumstances. We expect our results for the second half of fiscal 2025 to be somewhat improved compared to the first half of the year.

Our current visibility, healthy customer engagement, strong backlog and favorable macro tailwinds continue to give us confidence that we'll see higher revenue and continued positive adjusted EBITDA in the coming quarters, which we anticipate coming in another profitable year from MIND.

We have a differentiated and market-leading suite of products and favorable market environment. And now I'm very clean, debt-free capital structure. We look forward to capitalize on these positive factors to increase stockholder value as we move forward.

With that. operator, we can open the call for questions.

(Operator Instructions)

Tyson Bauer, KC Capital.

Congratulations, gentlemen.

Good evening. Thanks Tyson.

A lot less stressful for all involved now that the cap structure, obviously backlog will be somewhat of a focus, but I think your comments on the outlook kind of soften that we go from 38 to 31 to 26, add another 6. So you're about 32. So you're maintaining your backlog, you mentioned sustain revenue as we go forth in the next couple of quarters with an improvement in the second half results.

Do you look at that as kind of now we've hit that benchmark level where other than maybe some unique timing issues, we should be at that $10 million-plus going forward.

I think normally, you're correct, just understanding that when a particular order falls from one week to the next could have an impact on a given quarter. So if we look up by $9.8 million a quarter. I would not be panicking just as though WCR, because there's a $12 million a quarter.

I think one of the more impressive financial metrics that you posted in the quarter was your gross margin of [47.6]? I think I had you had about [45.5] that's 200 basis points ahead of schedule, which I'll take that over the little lighter on the revenue any day. Is that mainly from that operating leverage or is that just that pricing that's coming through or kind of a combination?

It's a combination of certainly the operating leverage helps a lot in a relatable to buy more rationally and product mix has an impact. So there are all sorts of things that go into that calculus. But we are very pleased about that. And that's something we've really been trying to focus on and we hope we can continue that going forward.

You see that being sustainable also or widening as we continue?

I would say more sustainable more again, if we saw a quarter being a different couple of points component points that wouldn't be fair.

Are you concerned at all again, just given what products you're in the quarter, what discount structures happen that sort of thing can impact a quarter to quarter. But I think again, we've done a good job of improving margins at the gross level.

I think another impressive financial metric here is cash flow from operations being up $1 million in the quarter, given you had a $3 million increase in your inventory spend a while that we've had a positive numbers on that line item?

Are we expected them to work down a little bit of that inventory or is that going to be kind of a sustained? And what is your net working capital outlook the second half?

Yeah, I would hope and expect that we'll be able to work that down a bit. And therefore, we're starting to see the cash flow turn a bit collecting receivables from things we've shipped. Again, we pre-bought inventory in some cases trying to work some of that down and maybe you don't have to do be quite as aggressive a future with that.

Having said that, we hope you get a big order next week that we need to now by the day to deliver in six months that can have an impact. But in general, I would expect historically analogous.

You go ahead and get those big orders to end, the diluted share count now that we only should be reporting positive EPS as far as GAAP purposes. So with the conversion, which is roughly 8 million shares, what I gave you a quarter around $0.1.

I want to thank you very much options or anything else in the money. So is that 8 million a fairly good, diluted number to work with?

Yes, it is there's nothing in the money at this point. So that gave me a good number.

And I was trying to working on the back of my notes. What are your looking at your book value post conversion? I know you talked about $15 million retained earnings and the preferred get rid of now. What is your book value looks like per share?

Tyson, I don't have the number in front of me. So I'd hate to just do something profit, I think you will be out this evening. I think you can do the math on that pretty closely, but I don't have a timing issue. I don't want missed out on that,

I'm talking about a lot of things outside of your actual business products and services, one of the key things, you're getting a market value of $29 million and you just got rid of a liquidation value preference of $48 million, which included getting rid of all of those accumulated dividends, which go away and will not continue to accumulate in addition to what the preferred value was in the marketplace before you did the conversion.

Are you a little surprised that we haven't seen an adjustment to your market valuation just based on those numbers alone?

You know, frankly, not really in that you kind of think about the natural arbitrage that's been in place and there's no there's not been demand by the common recently. People will be buying the preferred instead. Obviously, there are some people who bought the preferred who intended to unload immediately.

So I think we're seeing some of that selling pressure right now. So I would expect that to work itself off in the coming days and maybe weeks. And as we continue to work tomorrow, I think Phil stock price and take care of itself. So I'm not concerned about that.

Yes, as we work through those non-votes on the preferred and no votes, they're converted shares.

I would assume, given what you're giving as an outlook and what you posted on a pro forma basis, we should see some positive traction. All other things being equal.

I would expect feeling comfortable it.

Alright. I'm sure somebody else will have some business questions for you, but thanks a lot and great job guys.

Thanks, Tyson.

(Operator Instructions)

Ross Taylor, ARS Investment Partners.

Thank you, and I'll echo Tyson's. Congratulations and also thank you for your perseverance. It was not an easy thing to get done. I had some people telling me it wouldn't get done and it got done. So I think this is setting the stage for a lot of value creation going forward. And I'm confident as a preferred holder all be better off a year from now than I was I would have been under the old structure.

Couple of questions, what were inventory levels at quarter end?

Yeah, $20 million-odd.

Second is you talked about pulling down on CG&A as you're rightsizing the business, what kind of run rate G&A should we expect to see going forward either annually or on a quarter basis.

So we're too late at this quarter. I would like to see that down a little bit no and 1,000 or so not geographically, but it was just a point where we're starting to tweak things a bit and just headcounts in some places.

So it's kind of like that level, but we have annualized the two eyes and take maybe a $0.5 million off that maybe makes some sense. But that's those are rough numbers, obviously.

Okay. And that's a number that you should that, to annualized down, works out to us something around $10 million annually. And you're confident that as you grow your revenues that number should be able to hold towards that $10 million range?

Yeah, I think so. Yeah, for a while, at least probably spent about yes, to a point where we have to expand it. Yeah, within reason, yeah obviously.

I'm just wondering your public company costs, obviously, it's pretty expensive to be a small public company. We are not uncommon or the cost over $1 million, what kind of costs you guys incurred?

Yeah, that's a great question. So the added I think it's well in excess of your audit costs or more. You got it. Public reporting costs, you've got a shareholder cost. So I think well in excess of $1 million and probably approaching $2 million is not hard to get to.

Well, so it could be something as high as like $0.15, $0.16 a share in earnings impact?

That's really natural money for sure.

Yeah, under the 8 million shares. Okay. That's actually pretty meaningful in the past. You had to subtract the preferred dividends like the number and Tyson touched on this.

I had. Yeah, it always drives me crazy because I think Tyson reported numbers on an adjusted and the Street pick it up as gap. And so they reported as an earnings miss when in fact, I actually think you are probably in line with Tyson's number. He can come back on and confer that confirm that if I'm right or wrong, if I'm wrong, he can comment them laugh at me on that.

But when we're looking at that, that's what about almost $0.12 a quarter, roughly $0.47, $0.48 a year, when we go going forward when you get this, are you going to restate past earnings or is this all going to come out and that that you kind of make whole adjustment?

Yeah. So I don't hold me to this similar. We're still researching as to the proper way to do it because there's no clear guidance on some of those. I suspect the EPS will be restated and there will be a I think, really strange looking at just an EPS in the first quarter.

This $15 million charge to retained earnings with approximate $15 million actually will get reflected in EPS in that quarter, which kind of minimize that, we think that's what GAAP system do.

Yeah. And all I would say is breakout whatever that number is. So that even Bloomberg can pick it up and be right with our brands. You've talked about in the comments you made, you talked about the fact that you saw the second half being slightly better than the first half.

Can you tell us what number you're working on for the first half? And I'm looking at reported GAAP numbers. I have you earning about $0.58. I mean I adjust for the preferred dividends. I add that back. I get $0.24 added to that. So I'm talking about something that's in the $0.81 range. What do you see as the second half? I mean, what should be benchmarking slightly better against $0.57? Is that a different number? I'm not going to compare apples to apples, what should I be using as my first out?

So roughly, quote, break what Mark was alluding to a revenue level. And so roughly $20 million of revenue, maybe just below that in the first half. So that's what I was comparing to. And then just kind of do the math off of that as to what the EPS looks like. So I wasn't trying to do it from an EPS standpoint or from a net earnings standpoint.

Is there anything in the first half of the year that was uniquely one-time that we should be backing out to get that base level before we add back the preferred dividend.

I don't think there's nothing really unusual. I again there's some seasonality in some of our costs, some G&A costs that we've talked about that in the past. So nothing out of the ordinary.

Okay. So that's a really nice setup for the second half of this year.

Also your press release the last line and it was interesting to me, you made the comment is a sentence is this is an important step for MIND.

It simplifies our capital structure. It's actually the last two sentences. I went to public schools and in my opinion, set for creating meaningful stockholder value. Will you throw out some more color on how you see that value being realized? Is this setting up a situation where obviously we're going to have much better earnings, a clean balance sheet that creates one level of value.

But this is also create a situation where strategically you find things that it will be easier for people to look at MIND and value it appropriately and come up with a number that will be found acceptable to all shareholders in the past.

And finally, how does the first roughly $50 million was going to the preferred holders, which was very little for the common holders than our all in the same boat. So I'd love to get more insight into what your thinking is behind those two sentences.

Sure there's a couple of aspects to that, Ross. Certainly there's just the math of it or the corporate financing aspects of it that you'd alluded to and that I think that was my opinion, I think that people didn't really understand how to value or had it's been quite calculus to use and determine what's the impact of the preferred on the comment so I think taking that uncertainty away clarifies things.

I also think it gives us some great more give more flexibility in growing the company. And we're a small, very small company and we need to be bigger. There's different ways to get bigger. And I think having this uncertainty out of the way and this confusion, perhaps out of the way makes it easier for us to do other things, be it raise other capital to grow or maybe look for other partners to do things well. So just gives us a lot more flexibility to do lots of different things.

Well, thank you. And I would agree. I mean, if you just look at if you put a 10 multiple on the preferred dividend, you have a stock that should be closer to $5.4 or $3.5. So that alone.

Great. And we talked about the public company costs. I mean, there's a huge amount of value here, this company is clearly worth a lot more than $3.5 or $4 a share.

And I want to leave you with. I want to thank you I know, as I said, you worked very hard on getting this done. There was you and I know on the I didn't always support or agree with how you are handling this. But in the end, I think you trade at something that should unlock a tremendous amount of value.

And you and your Board, your leadership team are to be commended for quite honestly, sticking to something that most people would have walked away from.

Okay. Thanks, Ross. Appreciate that.

Sam Schwartz, Kaliber Management.

Hi, good morning, excellent report. So good to read and congratulations on the turnaround and looking forward, I have one particular question. I guess you don't seem to focus on and that is of MIND Technologies, involvement in artificial intelligence and your spectral software. I wonder if you could give us a little color on what's going on there.

Sure. That's something we developed in connection with our client operation initially at [grocery] so that we retain that IP and in the transaction, but then had some license that back to while in General oceans, the buyer as it relates to certain applications, specifically (Inaudible).

So right now, we are promoting that in connection with our agreement, our collaboration agreement with General oceans. It's early days of revenue from it has been de minimum running just a few tens of thousands of dollars so far.

But I think it seems that's pretty interesting. And I know that the companies who have looked at it and it's in the hands of a couple of significant customers around the world right now, the feedback is very positive that they there are some unique things about this software suite. And there's lots of APR automatic target recognition software out there and lots of lots of AI models out there.

But there are some things about this as it relates to data handling and ability to develop new models, which we think is unique. So we think there's an interesting opportunity there, but it is very early days and we're still exploring the best way to exploit that.

And it's not going to be at $50 million a year business, but you know, it doesn't need to be they can be something much smaller than that. I think you could add some pretty meaningful value to it. So it's one of the things that you can't bet the bank on right now but I think it's simply mentioned that time course, that we're trying to.

Great. Thank you very much.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Okay. Thanks very much. I'd like to thank you, everybody for joining us this morning and taking time to learn about kind of where we stand today and where we're going forward. We look forward to visiting you again of our third quarter or few weeks.

Thanks very much.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.