MIND Technology, Inc.

Greetings, and welcome to the MIND Technology second quarter fiscal 2024 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Ken Denard. You may begin.

Thank you, Operator. Good morning and welcome to the MIND Technology Fiscal 2024 Second Quarter Earnings Conference Call. We appreciate you joining us today. With me are Rob Capps, President and Chief Executive Officer, and Mark Cox, Vice President and Chief Financial Officer. Before I turn the call over to Rob, I have a few items to cover. If you'd like to listen to a replay of today's call, it'll be available for 90 days via webcast by going to the investor relations section of the company's website at mind-technology.com or via telephonic recorded instant replay until September 21st. Information on how to access these replay features was provided in yesterday's earnings release. Information on this call speaks only as of today, Thursday, September 14th, 2023, and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risk, uncertainties and other factors, many of which the company is unable to predict or control, that may cause the company's actual future results or performance to materially differ from any future results or performance expressed or implied by these statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its SEC filings, including its annual report on Form 10-K for the year ended January 31, 2023. As we start this call, please also refer to the statement regarding forward-looking statements incorporated in our news release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements. And now with that behind me, I'd like to turn the call over to Rob Capps. Rob. Okay, thanks, Ken.

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

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

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

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Tyson Bauer with KC Capital. Please proceed with your question.

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

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

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

Yeah. I mean, that will certainly continue to do that. Um, But also, remember, we have a large backlog that we are starting to build. So there's ongoing needs there as well. So it's a combination of things. Okay.

If we look at the first six months in CMAP, approximately $18 million. You're talking about some kind of revenue growth as we go forward. I'm guessing you're basing that off that $18 million for CMAP. that would imply at least a 36 for the year. If you have any kind of growth between 36, 40 million, depending on shipment timings and some other things that can throw a monkey wrench into that. But as of right now, is that kind of the view that you have is between 36, 40 million in revenue?

Yeah.

Excuse me.

Again, not wanting to get too specific, but I think, again, as far as the sense of magnitude, you're headed in the right direction. I think the interesting thing is, We have that history for the first six months, but I think more importantly, if you look at our backlog activity, it gives us visibility for the balance of the year and into next year as well, which is very important for lots of reasons. But you mentioned that the thing that we have to keep in mind is lots of things can happen that cause a particular shipment or two to slide from one way or another. And so some of these are sizable orders, you know, a few million dollars. So it only takes one or two of those to have an impact. So just everyone needs to keep that in mind. But the general trend is not different from what you described.

And the margins typically on CMAP, at least historically, have been closer to, on the growth side, what, 50 plus percent or 50 percent, depending on what kind of capacity utilization or how many you're actually being able to produce and deliver? Yeah, maybe not quite that. I'd say in the high 40s is kind of where we've seen things historically.

We have a reasonable inflow or throughput to the operation. Since we do have visibility going forward, that gives us some opportunities, we think, to be a bit more aggressive in some of our processes procurement activities as well as some of our production operations. So we're hopeful to be able to improve that somewhat, but it's really been in the high 40s.

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

Yeah, not entirely. I'm going to defer a little bit here. When we file our 10-Q later today, We're including some pro forma financials in that T&Q, which I think will give you some good visibility as to what the impact would have been. We alluded to it in our comments today, but I think that will give you some sense. Essentially, the client R&D goes away, which is a significant portion of our R&D. The direct client G&A goes away. And we also think there's some ongoing things we can do to continue to streamline the operation. We haven't quite quantified those yet. That's something we're looking to do to just make things a bit more efficient. But, again, look at the pro formas and the T&Q, and I think that will give you some good information.

And your interest expense goes away also.

Yeah, absolutely. Absolutely. Yep.

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

Yeah, again, we're just analyzing the overall situation and trying to understand, you know, how we can stabilize the ongoing, you know, overhead cost, but also what are the working capital requirements going to be to make sure we don't find ourselves in a position like we were a year ago and for a few months and having to, you know, really get by on a shoestring. And that's not what we want to do. That hurts the operation. So, you know, Certain things are much improved. Again, you're going to see from the pro formas what the numbers look like, so you can draw your own conclusions. But we're just going to take all that into consideration when we make our decisions.

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

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

Okay. And really off the table right now is the accrued amount. because we're not in that position to address that at the time being. So the decision is really whether or not we want to pay what is going forward and being current on the forward and then at some point in the future make a decision on what the accrued, whether or not you can back pay.

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

In your 10-K on regarding the reverse split, It appears that even though it is till November 15th, you will make a decision or a split, if it were to occur, would occur on the end of October, which the implication is if you have to have 10 days above a dollar, that would have to occur within the next four weeks. You're right about that. The scenario is that we have a reverse split, one for 10, just throwing that out there because that was in the proxy. will occur or would likely occur at the end of October.

That is not an unreasonable assumption.

Okay. Oil, $90. Heating oil is up 40% since July. A lot of tailwinds are building. That would be favorable for CMAP. And just to give the listeners a little sense, when your major competitor left the market a year ago, lot of these decisions on whether or not you get a contract or not is whether the ultimate customer just wants to go ahead and and place that order it's not really a competitive situation where you're going against somebody else as we've seen in years past yeah as it relates to source controllers that is definitely the case we were pretty much the only game in town we do have some competition

uh for the positioning systems buoy link and we do have some competition uh for the streamer systems but you know we are focused more on the high resolution high resolution three-dimensional applications used for survey purposes more than deepwater exploration so we don't go head-to-head with the the deepwater streamer systems so we do have some competition there but it's pretty thin this is fair to say

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

I'm on the board. Mark is not.

Okay. You're on the board. The board is going to ask for your recommendation being the CEO and the CFO's recommendation on outlook and financials. Are you willing to share what you would recommend, even though that is only one cog in the decision that the board will make ultimately in regards to the preferred and going forward? No, I don't think we want to comment on that.

The board as a whole will make that decision, so it wouldn't be appropriate for me to comment on that. Okay. Thank you, gentlemen. You bet.

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

Always hard to follow Tyson since he asks all the good fundamental questions. So, Rob, I'm just going to voice some thoughts here. First, The preferred is actually pretty damn good paper. In fact, it's really good paper for you guys. And there's no way you can go into the marketplace. You paid off a term loan that was, what, 12.9, I think it was. This preferred is almost 400 bids under that. The fact that you guys and the board might choose not to pay that off, every time you do that, I mean, as an equity holder, I've sat here forever waiting for you guys to get it right. And you're close to getting it right. And I have this feeling you're about to snatch defeat from victory. Because what, if I'm a preferred holder and I get two directors, the first thing I'm telling my directors to do, hire a banker. And there's no way, even with your plans and your confidence, there's that hesitancy, and you hear it in your comments, that makes it impossible for this board to say no to any deal that that banker found that would make the preferred holders hold and the equity holders walk away with next to nothing. And so it's important. Let's get that paper off the back of the common holders. It's straightforward. You can't borrow at 9%. And in fact, you should get it going. And that paper is better than going to the bank. I mean, eventually you'll be able to go to the bank and probably borrow in the high single digits. But at this point in this environment, And it frustrates me. And I, I just, I sensed that the common holders just going to be asked to hold the bag and you're going to do a reverse split, get the stock above a buck. But in reality, that eight, $9 million in value that's attached to the common right now is basically there on the hope that you guys get this thing worked out with the preferred holders. So, you know, you are on the board and I've known you for a long time, and I know you're a good person and a smart person. And I can't believe that you and this board are going to let this situation go where you defer the payment again. Because as I said, I'm confident, you know, Tyson's a smart guy, and I'm sure some of those preferred holders talk to Tyson. And I'm sure they're pretty confident that this company is worth, you know, somewhere between $26 and $50 million or more. And if they sell it at $50, the preferred holders walk away with everything. And you can't let that happen. Can you?

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

Yeah. I mean, to be honest, I don't want to come back to a call having supported you guys for this long and had you guys basically have, you know, for want of a million dollars paid to the preferred holders, you know, basically told the equity holders that they don't have an asset. I've waited too long. This has not been a successful investment for me. but we can still snatch victory from the jaws of ignominy. So let's do it. Okay.

I appreciate it, Ross. I do appreciate your comments.

Thank you, sir.

You bet.

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

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

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