MIND Technology, Inc.

Greetings, and welcome to the MIND Technology third quarter fiscal 2025 earnings call. At this time, all participants are in listen-only mode. A 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, Zach Vaughn. Thank you. You may begin.

Thank you, Operator. Good morning, and welcome to the Mind Technology Fiscal 2025 Third Quarter Earnings Conference Call. We appreciate all of you joining us today. With me are Rob Capps, President and Chief Executive Officer, and Mark Cox, Vice President and Chief Financial Officer. Before I turn the call over to Rob, I have a few 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 a recorded instant replay until December 18th. Information on how to access this replay was provided in yesterday's earnings release. The information reported on this call speaks only as of today, Wednesday, December 11th, 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 31st, 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'd like to turn the call over to Rob Capps.

Hey, thanks, Zach. And I'd like to thank everyone for joining us today. So today I'll discuss some highlights from the quarter. Mark will then provide a more detailed update on our financials, and I'll return to wrap things up with some remarks about our outlook. As expected, mine delivered strong third quarter results. Our business continues to operate efficiently, and our emphasis on cost management and execution is yielding returns. Our cash flow from operations again grew during the quarter, which helped improve liquidity. We're also pleased to have generated our fourth consecutive quarter of profitable results. These results are great indicators of the transformations we've made. We're building good momentum. That's visible in our backlog and pipeline of orders, which I'll elaborate on in a moment. Our improved capital structure and encouraging business environment provide MIND with important opportunities that we look to take advantage of in the coming quarters. we believe MIND is strategically positioned for growth, improved financial results, and continued profitability in coming periods. As I touched on last quarter, the conversion of all preferred stock into common stock was a significant development. Upon the conversion, we issued approximately 6.6 million shares of common stock and now have just under 8 million shares outstanding. All outstanding preferred stock along with the associated accrued but undeclared dividends, have been retired. The impact of this conversion can be seen in our third quarter financials. Mark will touch on the accounting for this transaction in just a moment. We entered the fourth quarter with a strong backlog of approximately $26 million. While the backlog is essentially flat, we made substantial order deliveries during the third quarter that contributed to our improved revenues, yet we were able to offset this activity with new orders. As I previously mentioned, order flow is often sporadic, and we don't announce each and every order we receive. However, the general trend is one of elevated order flow and activity, and our backlog is much higher than historical standards. Beyond that, we have an active pipeline of pending and highly confident orders and prospects that are well in excess of our backlog of received orders. We currently estimate this pipeline to be more than double our backlog of firm orders. This robust backlog and pipeline of opportunities gives us confidence for improved financial results in the coming periods. Three meaningful contributors to our strong backlog are gun link source controllers, buoy link positioning systems, and sea link streamer systems. CMF enjoys a strong market position with these products, even a dominant position in some cases. We currently have a number of pending orders across these product lines, and I'm confident that the favorable market dynamics and our focus will prove to be a recipe for success in generating many more orders in the future. As we continue to grow our installed base of products, we also increase our opportunity for aftermarket business, such as spare parts, repairs, and support. The third quarter of this year, approximately 40% of our revenue came from this aftermarket activity. Now, as I've done in the past, I must remind you that the timing of the specific orders is subject to variability due to any number of challenges, unforeseen circumstances, or just customer delivery requirements. The visibility that our backlog and pipeline gives us has allowed us to better manage supply chain issues. For the past year or so, we've been aggressive in acquiring key components for those with long lead times. While this has contributed to an increase in inventories, it has allowed us to meet the delivery requirements of our customers and increase revenue. We've recently been able to draw down our inventory balances to some degree and expect that this trend to continue into the fourth quarter. Turning to our results, we again were able to grow our revenue both sequentially and year-over-year. Marine Technology Products revenues for the third quarter of fiscal 2025 were $12.1 million. We continued to capitalize on macro tailwinds and customer engagement to stimulate order flow and generate improved results. We're also continually working to improve our execution, efficiency, and cost structure. which we expect to contribute to sustained profitability in future quarters. General market conditions within the marine technology space continue to be strong. We see a number of opportunities to continue to field inquiries and respond to requests for accreditations. Our team continues to develop new and innovative ways to adapt and implement our technologies to meet the evolving needs of our customers. Recent sales and inquiries related to our C-Link streamer systems are a good example of this. As a result, we are making additional investments to further develop and advance the next generation of our ultra-high resolution C-Link streamer system. I'm confident that our differentiated approach and best-in-class suite of products will continue to give us the competitive advantage to address the growing demand we're seeing within the marine technology industry. We'll continue to see traction for our Spectral AI software suite While revenue from this has been de minimis thus far, customer feedback has been very positive. There are a number of prospective customers that are being pursued. We're also exploring ways in which we can more quickly address an expanded market for this technology. Now, for that, let me let Mark walk you through our third quarter financials in a bit more detail, then I'll come back.

Thanks, Rob, and good morning, everyone. As usual, I'd like to remind you that with the sale of Klein, Those operations have been treated as discontinued operations and results for periods prior to the sale in August 2023 have been restated to reflect that. Accordingly, the prior period comparative data reported yesterday and discussed here today do not include amounts related to client. They include only our ongoing business. Rob mentioned earlier, Revenues from marine technology product sales totaled approximately $12.1 million in the quarter, which was up about 143% from the same period a year ago, 21% sequentially from our fiscal 2025 second quarter. The strength we're seeing in all our key markets and the favorable customer demand environment continues to support our backlog and significant pipeline of highly competent orders positioning us well for sustained high-level revenue in the coming quarters. Third quarter gross profit was approximately $5.4 million, which was about 141% higher when compared to the third quarter of last year and up 13% sequentially. Gross profit margin was 45% for the quarter, which was essentially flat with the year ago and down sequentially. We implemented various price increases earlier this year, and we are benefiting from greater production efficiencies throughout the business that are both meaningfully contributing to overhead absorption and improved margins. Our general and administrative expenses were approximately $2.8 million for the third quarter of fiscal 2025, which was flat sequentially but down compared to a year ago. As we highlighted last quarter, These reductions in general and administrative expenses stem mainly from our ability to streamline overhead costs following the sale of Klein, most notably corporate expenses related to the support of Klein. Our research and development expense for the fiscal 2025 third quarter was $562,000. Costs are largely directed toward the development of our next generation streamer system. Operating income for the third quarter was approximately 1.9 million compared to an operating loss of approximately 1.5 million in the third quarter fiscal 2024. Third quarter adjusted EBITDA was approximately 2 million compared to an adjusted EBITDA loss of approximately 1.1 million in the third quarter a year ago. That income for the third quarter was approximately 1.3 million, which was an improvement of approximately 3 million from the net loss of approximately 1.7 million in the third quarter fiscal 2024. As Rob mentioned, we're pleased to have achieved another quarter of profitability, our fourth in a row, and we expect to continue building on this momentum in future periods. As of October 31st, 2024, we had working capital of approximately 21.2 million. including 3.5 million cash on hand. Quiddity continued to be impacted by our operational requirements, such as acquiring inventory and executing on our backlog of orders. However, we did generate 1.6 million of cash flow from operations in the third quarter. This represented a sequential increase of 84% compared to the second quarter. Balance sheet remained strong, we were debt free, and the company maintains a clean capital structure following the preferred stock conversion in September. We now have solid footing and flexibility from which to enhance stockholder value in future periods. As we mentioned last quarter, our third quarter results reflect the conversion of the preferred stock into approximately 6.6 million new shares of common stock. We've recorded this issuance at the market value of the common stock, less associated transaction costs, such as legal fees and solicitation costs, and the carrying value of the preferred stock has been eliminated. The excess of the carrying value of the preferred stock over the recorded value of the new common stock, which was approximately $15 million, has been credited directly to retained earnings. This amount is also included in the calculation of earnings per share attributable to common stockholders, but is not included in net income. I'll now pass it back over to Rob for some concluding comments.

Okay, thanks, Mark. We're pleased that mine continues to benefit from significant customer interest and engagement related to our CMAP product lines. A robust pipeline of orders and improved visibility gives us confidence for sustained higher-level revenue. We've streamlined our operations and focused our efforts in recent years. This strategy is yielding positive results. We now have a very clean capital structure after the conversion of preferred stock to common stock. When combined with our lean operating structure, this provides a great deal of flexibility from which to pursue opportunities. However, we also remain dedicated to managing costs to improve margins and enhance our bottom line. Now that we are so much better positioned as a company and the macro environment is advantageous for MIND, I'm excited for us to actively chase new initiatives and opportunities. We've developed valuable partnerships and customer relationships that have enabled us to build up a strong backlog and that continue to drive new orders. Our marine technology products continue to penetrate a variety of industries and markets. We believe our backlog of firm orders and pipeline of 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 third quarter, we believe MIND is poised to capitalize on additional opportunities and deliver improved results in coming quarters. As a result, we expect to deliver positive adjusted EBITDA and profitability as we conclude fiscal 2025 and look ahead to next year. Looking forward, we remain encouraged by the current demand environment and customer engagement we're experiencing. We expect our results for the fourth quarter to again be improved when compared to the third quarter. Additionally, our current visibility, healthy customer engagement, strong backlog, and significant pipeline also give us optimism for fiscal 2026. We have a differentiated and market-leading suite of products, a favorable market environment, and supportive pale winds. Our business is also benefiting from an improved balance sheet and capital structure, which will be instrumental as we strive for growth. We look forward to wrapping up this year on a high note and remain focused on generating improved stockholder value in future periods. With that, operator, we now open the call up for some questions.

Thank you. We'll now be conducting a question and answer session. If you'd 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, and excellent quarter.

Hey, Tyson. Thanks.

It seems like we've now entered into the phase of more of the blocking and tackling quarters with a lot of the financial noise behind us, which is obviously a relief to all. And we're now starting to build that cash buffer for the company. Appears like you should be able to end the year, your fiscal year, at about $5 million in cash, unless you have some networking capital gains or other uses that could embellish that number going forward. With that type of capitalization now in place and building that cash buffer for you, what... does that open up for you where we were going from survival to now looking at more of a growth phase for the company?

Yeah, so I think it gives us options. Before, we didn't have a lot of options. Look back a year ago. So it gives us the ability to look at different things. How can we expand the product offering? How can we take our technology into different markets? So it just gives us that flexibility. It also gives us the working capital to maybe pursue some other projects that perhaps we just couldn't before because of the capital requirements of it. So it just gives us options. I don't see us going out and making a big acquisition, and that's not what we're about. But what we want to do is to add things that are tangent to what we're doing now and start to slowly build our portfolio and build that revenue base.

Speaking for myself, I'm not sure the street or shareholders necessarily want you to go out and do a large acquisition at this point in time. I couldn't live through that. Yeah, exactly. Give us a sense. I think one thing that is missing from prospective shareholders and institutions that we talk with is just the scope of your global installed base. When we're talking about seismic fleets and other service providers in the marine side, that parts, that services business, really is a growing annuity force for your future financials. Give us a sense of that global installed base and what that means.

Well, you're exactly right. I mean, we have equipment installed with, you know, Every seismic contractor in the world, plus many survey companies in the world, this stuff is used in very harsh environments. So it breaks, just the nature of the beast. So there is a great deal of opportunity for us to provide spare parts, repairs, field service, training. for this increasing stall base. And that doesn't go away. Those guys are out there and they always have to replace things. It's a good, relatively steady flow of business, which I think is going to continue to grow. We do that business here in the U.S. in our Huntsville facility. We do it in our Malaysia facility, nearby Singapore. We send field service people, you know, out all over the world to do things on the vessels. So we literally are anywhere in the world that you can be. Obviously, you can't go to Iran and North Korea and Russia. But, you know, everywhere else, you know, we are providing those services.

And because a couple years ago the bigger competitor dropped out of the industry and This really is your ball field here.

In some cases, certainly with source controllers, we are the only game in town. Now, that's within a niche for sure, but we're the guys. There is some competition in other areas for positioning systems and for streamer systems. But again, in the areas in which we're playing, the applications that we're focused on, we think we have a demanding or a leading position, I should say, and frankly have a technological edge over any competition. So we think we're very well positioned on that. That's a growing area for us.

In the last quarter, you brought up the concept of leverage versus pricing. helping out margins. We saw that leverage on your operating expenses, that additional top line and holding the operating expenses there. The gross margin, a little light, but you have product mix, you have other things that go into there. Is that something that we should see a greater influence on that pricing side as your new orders, that pipeline is fairly robust, and with the addition of the leverage on the operating side, we'll see bigger improvements in that EBIT margin.

Yeah, so I think just to give some color on that, I think the operational leverage, we've seen a lot of that benefit. I think just as top line grows, you'll continue to see more of that, but maybe to a lesser degree. I think we do have some pricing leverage here. A lot of the revenue we delivered this past year was actually quoted the prior year. So almost two years old pricing. So I think we see some opportunities to improve that, maybe be a little more aggressive on our discount structures, and therefore bring some more to the bottom line.

Okay. And the question you hear in a lot of these conference calls, with the new administration coming in, pros and cons, obviously possible tariffs on one side, deregulation on the other side, which can improve golf activity, comments from PEMEX. which we've heard various times throughout the past decade plus that don't necessarily materialize. But just your sense within the industry of their outlook in general and how that improves your outlook.

Yeah, so I think it's certainly different. Not a negative. It's a positive, if anything. I think the direct impact, as you mentioned, is probably going to be more permitting issues in the Gulf of Mexico. And so, yeah, that has a positive impact. But, you know, again, our customers are working all over the world. So, you know, what this administration does doesn't impact, you know, West Africa or off the coast of Brazil. But that is a positive, I think. So I think it's a positive. A positive, but not a huge impact. I don't think you'll see a direct impact from us. I think, you know, the other issues you hear about, that tariffs and whatnot, you know, I don't see that as an impact for us. Again, remember, we're manufacturing and shipping out of Singapore. So we're delivering out of Singapore. So I really don't see an impact that might come from anything of that nature.

Okay. This is the time of year that a lot of your customers are making CapEx decisions for the next calendar year and beyond. Would you anticipate more new order flow as we get beyond the first of the year and really early next year, a little pickup in that activity?

Yeah, I mean, it's kind of lumpy, as you know. There are a number of prospects that we are in the middle of right now, which could come to fruition tomorrow or it could be another month or another two months. It just kind of depends when they pull the trigger. And part of it is predicated upon what they see their demand being. Do they want a particular project? Therefore, that need that they have has a specific time frame. So that's really what drives a lot of this. But I'm confident we'll see additional activity, if not later this year, certainly into early next year.

Okay, and last question for me. You talked about new generation streamer becoming available. Would that be a prelude to more full system sales once that gets available to the industry and your customer base? And would you expect favorable pricing and margins on that new product coming out?

Yes, I mean, I think it's not the next, you know, two or three months sort of thing. It's, you know, further down the road a bit. But I think it will allow us to, you know, again, address the competition a little more effectively. And also, I think it will allow us to perhaps address an expanded market as well. Perhaps there are some installations or applications that we're not best suited for today, but maybe would be with our improved technology. So I think that will expand our addressable market. You know, probably not a big impact on 26, but going forward from there, I think that's where you'll see the benefit.

Sounds wonderful. Thank you, gentlemen.

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

First, it's always exhausting to follow Tyson because you're having to spend so much time crossing off your questions. First, congratulations on everything you guys have accomplished this year, especially the operational performance, which is really impressive. I have not seen a queue yet. So is it possible that you give us what the gap earnings would be this year, year to date? Obviously, your early gap earnings were impacted by a number of other factors. These are impacted by some factors, but I'm trying to get a run rate earnings per share number for where you're sitting at this year.

So, year-to-date, nine-month income from net income, rather, is $3 million, $3,043,000.

Okay. Thank you very much.

That's before all the dividend activity, yeah.

Yeah, that's what I was looking for. Thank you very much. You said about 40% of revenues, and you and Tyson talked about the aftermarket aspect of your business. Is that 40% a number that one should see kind of on an annual basis? I understand because of the fact that it's kind of youth-driven, you might have some seasonality or some orders that are higher or lower, but is that a reasonably good number overall, or should we expect to see that be somewhat lower or grow higher as you get more product in the field?

Yeah, that's a great question because you look historically, it's been around that level, the periods we've looked at. That's something we used to track until the last year or so. There's two factors that drive that, that percentage. It's just, it's the math. So you've got bigger system sales. It's going to drive that percentage down, obviously, where you have higher, you know, actually, you know, Absolute sales of that activity is going to drive higher. So it's really a function of the two. I would expect the absolute amount to continue to increase. It just makes sense. You've got more stuff installed. You've got more customers out there. There's more stuff to keep maintained. And you don't have to resell that either. That's the other thing. Right. It happens by itself. And it tends to have a bit better margins as well, as you might imagine.

Yes, and I would assume that it doesn't matter how new or old a piece of equipment is. It's really how it's being utilized and used, which is what drives the need for it, so that even a new piece of equipment can result in aftermarket sales reasonably quickly if it turns out that it's used in the right environment.

As a matter of fact, most large system deliveries include a spares component, so people buy spares up front because you know it's going to happen. Yeah.

I can see a lot of, a lot of things can go wrong with that. Um, what are the needs you talked to things? One is what is the, what areas are driving your sales growth in here? I mean, we, I look at you guys and that we've seen, you have the energy market, you have the defense market, you have the subsea mining market, you have the mapping market, you have other markets, you know, looking for Malaysian airliners, probably, um, things of that nature. What is it that's actually, what are you seeing or are you seeing, you know, new areas of interest out there?

So the big drivers, obviously, still, you know, energy exploration has been on a rebound. So that certainly is a positive for us. But also, marine survey activity is a big driver for us recently. You know, doing ocean bottom surveys for carbon capture installations, for wind farm installations, for all sorts of other stuff. So those are the things that have been driving things most recently. I think there are opportunities in other areas, but those two things have been the big drivers so far.

And I would think that when the UN has a program that wants to map all the world's ocean bottoms, so I would assume that as that goes forward, that's a market opportunity or a continuing source of demand. But also the growth of drone submarines and the like, it strikes me as there's a lot of need for subsea mapping along with that type of effort where if you're going to program something to go somewhere, you better know that there's not some large rock in the way. Is that an area where you're seeing growing interest?

So not directly for us. I mean, what we're doing is providing survey for the subsurface of the ocean bottom to some Some depth. So things that are actually on the surface itself, that's really other technology. That's really more the client technology that we sold that really addresses that sort of need. But having said that, you know, as we see more installations and more things, you know, going to the ocean bottom, that's going to continue to drive our demand from our survey customers. And also, we still see opportunities to take that technology into other areas such as domain security, things of that nature, which we've talked about a lot. And frankly, that's an area that we've put on the back burner in the last year and a half as we've tried to focus on current revenue opportunities. But I think that's something we can readdress. There certainly are some opportunities here for us going forward.

Okay, that would be great. Also, you talked about the new products. What kind of CapEx or R&D funding needs do you see happening for those?

I think if you look at what we've been doing this past year, I don't see a big change from that. There are some ups and downs from quarter to quarter just based on prototype deliveries and things like that. But in general, it's going to be that level of spending.

Okay. Is the cash conversion ratio, which was a little over 13% this year, something we should expect pushing forward?

Well, Ross, that's a really tough one to nail down. I would expect it to improve a bit in the near term. That really depends on, you know, how orders come in and what we have to do about replenished inventory is really going to drive that a lot. So I'm hesitant to be too precise here, but I would expect to see some improvement, at least in the near term.

Perfect. Fantastic. And lastly, I would agree with Tyson's comment that I think at this stage, given all the success and opportunity, I'm not sure I want to see you guys do a big acquisition just yet. I'm not saying you can't manage it, but I'm saying let us get to understand what the powerful profitability matrix here is, and then we can push forward.

Ross, you're preaching to the choir. Yeah. I often do.

Ask my dogs. Okay.

Thanks, Ross.

As I said, you guys are doing a great job. I think this has really turned things around business-wise. To me, quite honestly, when I look at what you talked about, your earnings, your $3 million in earnings for the year, that basically – gives you a run rate that's probably north of Tyson's or around or north of Tyson's estimate, which quite honestly, even at the current price of the stock, makes it ridiculously cheap. The market will recognize it, but you guys have done a lot to get there. I want to thank you for your efforts. I appreciate that, Ross.

You take care. Have a great holiday, by the way. You too.

Thank you. Ladies and gentlemen, As a reminder, it's star one to join the question queue. Our next question comes from the line of Igor Noyotse with Laris Capital. Please proceed with your question.

Hello, everybody, and thank you for taking my question. I'm a little bit new to the stock, so I started out as a preferred shareholder and ended up actually running their business. Now, after this quarter, I love it even more. So I have a couple of questions. First of all, you specifically mentioned that you have pending and pipeline orders more than twice as much as your backlog. Maybe you can tell me, is it an unusual situation or is it somewhat unusual? In other words, maybe you can compare and contrast, you know, this period, the previous periods. Is it normal that you have pipeline and pending orders such as such a big migration extending your backlog or that's just something which is the nature of it?

It's not that unusual at all. That's just kind of, you know, it varies from period to period, obviously, based on specific orders. But I think that's not at all unusual if you look back historically. We've always tracked a number of orders. We've historically been pretty conservative about what we report. So we're only reporting firm orders. So I wanted to give a sense of, you know, again, the total opportunities that we see out there. But I think that's pretty common for us.

Okay. My other question, one of the justifications for the preferred convergence was mentioned is for you to become a more attractive acquisition target space. You don't have a preferred overhang anymore. Any thoughts? I know A couple of callers before me mentioned the apprehension of you doing that position, but let's take it from the other end. Any thoughts of going private, considering how cheap you are, and a lot of companies are going private now. Are you guys, perhaps, a special committee to explore strategic options or anything? Any thoughts now that your capital structure is so much better?

Well, obviously, going private is a difficult thing, especially with a shareholder structure such as ours. It's very difficult to do. We want to drive shareholder value just like you do and everyone else does. So if there are opportunities for us to combine with someone else in some manner, we're certainly open to looking at those sort of things. But we're going to concentrate on growing the business at the same time because you can't force those things to happen. They happen when they happen. You just have to run the business, and that's what we're trying to do now.

Okay, fair enough. My other question, obviously you're in a very cyclical business, but there is also a growth component. So maybe you can break it up a little bit of where they are in the cycle. So there seems to be an upswing to the cycle for your products versus which part do you think you can grow permanently and which part is going to remain cyclical and remove basically change of market conditions?

Yeah, that's an interesting question. I think the streamer business, the seedling business probably has the most upside near term just because that's been a smaller part for us. But having said that, I think we continue to see opportunities for our source controller business for gun link, even though we have a dominant market position there. We see opportunity to deliver improved technology, so replace existing installations, things of that nature. So I think I see opportunity across all areas.

Okay. Thank you very much. Thank you.

Thank you. This concludes our question and answer session. I'll turn the floor back to management for closing comments.

I can thank everyone for joining us today, and we look forward to talking to you when we report our fourth quarter and year-end earnings early in the new year. Thanks very much.

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