Q1 2025 Mind Technology Inc Earnings Call

Participants

Ken Dennard; IR; MIND Technology, Inc

Rob Capps; President & CEO; MIND Technology, Inc

Mark Cox; VP & CFO; MIND Technology, Inc

Tyson Bauer; Analyst; Kansas City Capital Associates

Ross Taylor; Analyst; ARS Investment Partners, LLC

Presentation

Operator

Greetings and welcome to the Mind Technology first-quarter fiscal 2025 earnings call. (Operator Instructions) As a reminder, this conference is being recorded and it is now my pleasure to introduce your host, Ken Dennard Thank you, sir. You may begin.

Ken Dennard

Thank you, operator. Good morning, and welcome to the Mind Technology fiscal 2025 first-quarter earnings conference call. We appreciate everyone joining us today. With me are Rob Capps, President and Chief Executive Officer; and Mark Cox, Vice President and Chief Financial Officer.
Before I turn the call over to Rob, I have a few items to cover. If you'd like to listen to a replay of today's call, it will be available for 90 days via webcast by going to the Investor Relations section of the company's website, and that's minddashtechnology.com or via a telephonic instant replay recorded until June 18. Information on how to access these replay features was provided in yesterday's earnings release.
The information reported on this call speaks only as of today, Tuesday, June 11, 2024, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.
And before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control that may cause the company's actual future results or performance to materially differ from any future results or performance expressed or implied by these statements.
These risks, uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC, including this 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 that behind me, I'd like to turn the call over to Rob Capps. Rob?

Rob Capps

Okay. Thanks, Ken, and thank you all for joining us today. Now I'll start by discussing some highlights from the quarter. Mark will then provide a more detailed update on financials, and I'll wrap things up with some remarks on our outlook.
It's only been six weeks since our fourth quarter and year-end call. So you can expect that many things haven't changed much since then. We're pleased to again report positive results. To continue to operate efficiently while converting our backlog into a sustainably higher level of revenue. We've been able to build on the momentum that we generated last year, this resulted in another quarter of positive adjusted EBITDA and overall profitability for Mind, We remain well positioned to achieve positive adjusted EBITDA and favorable results in future periods.
We maintain our belief that Mind is strategically positioned for growth. Our GunLink source controllers, BuoyLink positioning systems and SeaLink streamer systems are all contributing to our strong backlog, and we're optimistic that we'll generate additional orders for these products as the year progresses.
Favorable macro environment, a narrowed focus, strong customer relationships, ever-increasing capabilities and valuable partnerships have boosted our order flow in recent quarters. I remain confident that we're the partner of choice for companies looking to acquire high quality and personal bearing technology products.
We entered the second quarter with a strong backlog of approximately $31 million. Our backlog is down a bit sequentially. This has to be expected at times as we execute and make deliveries. New orders don't necessarily arrive at a constant rate throughout the year. We still maintain a meaningful book of business that is significantly above for a study a year ago. In fact, the backlog at the end of the quarter was over 70% higher than at the end of last year's first quarter.
We believe this robust backlog and the many other opportunities that we are pursuing bode well for favorable future financial results. As always the case, the timing of certain orders is subject to variability due to any number of challenges unforeseen circumstances or customer delivery requirements. I continue to believe that this order flow is indicative of our specialized capabilities and differentiated product lines, not encouraged by the implications of this for future results.
Our marine technology product revenues for the first quarter of fiscal 2025 were $9.7 million. Our ability to sustain higher revenue levels, despite the challenges of shipping order and delivery schedules is a direct representation of the strength and customer engagement, macro tailwinds and resulting order flow that we're experiencing.
We've also taken necessary steps to improve our cost structure, which has enhanced our profitability in recent quarters. While supply chain issues are much improved, they're still with us to varying degrees and can impact results in particular periods. These challenges are simply a component of doing business, and we will almost certainly encounter them again in the future.
The magnitude of our backlog and expected orders does give us better visibility and therefore a better ability to manage our procurement process and improve margins. However, as evidenced this quarter, the increased level of activity also means increased capital requirements. As you will note, in this quarter, we did utilize liquidity to fund working capital requirements, consisting of increased accounts receivable and inventories. We continue to believe that the current market environment is advantageous for Mind.
Each of our key markets remain loaded with opportunity. In addition to now operating a more streamlined and focused suite of products, our team continues to develop new and innovative ways to adapt and implement our technologies to meet the evolving needs of our customers.
We're confident that we have the best in class technology to differentiate Mind premise competitors and address the growing demand surrounding recent developments than the marine technology industry. Included in our backlog are orders for ultra high-resolution survey systems, some of which we expect to deliver in the second quarter.
These systems are often used to detect subsea boulders and other geo hazards to assist and de-risking offshore installations such as wind farms and carbon capture facilities. These are new markets for us and ones that we continue to think bring great promise as we're pursuing other opportunities for these systems. It is also is a growing opportunity for Mind to provide seismic streamer repair services, not only for sealing streamers, but also for products manufactured by others.
We continue to see traction and for our spectral AI software suite through our collaboration agreement with General oceans. The software is now being used by two NATO navies with several other promising prospects. Well, the contribution has been minimal to date, we are optimistic about its prospects hope to find further applications for this technology.
Now I'll let Mark walk you through our first quarter financials and results in a bit more detail.

Mark Cox

Thanks, Rob, and good morning, everyone. Consistent with the past several calls, I would like to remind everyone that with the sale of Klein, those operations have been treated as discontinued operations and prior period results have been restated to reflect that.
Accordingly, the results from continuing operations that we reported yesterday and are discussing here today, including prior period comparative data do not include amounts related decline. They include only our ongoing business.
As Rob mentioned earlier, revenues from marine technology product sales totaled approximately $9.7 million in the quarter, which was down about 9% from approximately $10.6 million in the same period a year ago. The shifting of deliveries and the impact of that on quarterly revenues is just a fact of life for our business.
We continue to believe the underlying strength we're seeing in all our key markets and the significant customer demand driving our robust backlog positions us well for sustained high level of revenue in the coming quarters.
First quarter gross profit was approximately $4.2 million, which was down approximately 7% when compared to the first quarter of last year. However, gross profit margin was approximately 44% for the quarter, which is an increase from the same period a year ago. Gross profit margin improved despite lower revenues in the quarter, as a result of price increases implemented in fiscal 2024 and increased production efficiencies.
Our general and administrative expenses were approximately $2.8 million for the first quarter of fiscal 2025, which was down sequentially from $3 million and more notably down 17% from $3.3 million in the first quarter of last year.
As we mentioned on our last call, the sale of Klein is allowing us to streamline our operations and thereby reduce some costs. In addition to decline related savings in the fourth quarter that were masked by typically higher year end G&A spending. We realized further cost savings in the first quarter associated with reduced corporate expenses attributable to Klein.
Our research and development expense for the first quarter was $462,000. This was down both sequentially and compared to the prior year period. These costs are largely directed toward the development of our next-generation streamer system and continued development of our spectral AI software suite.
Operating income for the first quarter was $730,000 compared to operating income of $419,000 in the first quarter fiscal 2024. Our first quarter adjusted EBITDA was $1.5 million compared to $874,000 in the first quarter a year ago.
Net income for the first quarter was $954,000, which was an improvement of approximately $1.1 million from the net loss of $124,000 in the first quarter of fiscal 2024. Net income in the quarter was positively impacted by the sale of approximately $469,000 of lease pool equipment. As Rob mentioned, we're pleased to have achieved another quarter of profitability and we hope to continue building on this momentum in future periods.
As of April 30, 2024, we had working capital of approximately $19.3 million and $924,000 of cash on hand. As expected, liquidity was impacted during the quarter due to Mind's operational requirements related to acquiring inventory and executing on our backlog of orders. Balance sheet remains strong following the sale of Klein last August, which enabled the company to eliminate its outstanding debt. And as of today Mind remains debt free.
I'll now pass it back over to Rob for some concluding comments.

Rob Capps

Thanks, Mark. Mind continues to benefit from the strategic transformation we embarked on several years ago. Most recently, we've been able to refocus our attention for the set of Klein last year. We believe the company is better positioned today than at any other time in its history.
Our focused approach and streamlined operations have given us a lean operating structure and improved our ability to control costs. As a result, first quarter built on our positive momentum from recent periods to deliver favorable results that were in line with our expectations. Our goal of maintaining positive adjusted EBITDA and profitability throughout fiscal '20 to '25 is well within our sights.
Market conditions remain favorable. We believe there are still notable opportunities for our (inaudible) unit and for our other initiatives, We've developed valuable partnerships and customer relationships that enabled us to build a strong backlog in our marine technology products continue to penetrate a variety of industries and markets.
I believe this is a direct correlation to the work that our team has done to develop and continually adapt our technology to meet the evolving needs of our customers. We believe our significant customer engagement and the orders received to date are indications of the market adoption of our product lines. We're pleased with the results for the first quarter. We believe Mind is poised to capitalize on additional opportunities and deliver improved results in the coming quarters.
Despite these positive results in our favorable outlook as expected during the quarter, we utilized liquidity to acquire inventory and execute on our backlog. This is a prime example of what we've discussed in recent quarters about our need to retain capital from operations and execute our book of business and deliver orders.
This further supports a rationale behind the continued deferral of dividends on our preferred stock, as well as our decision not to repay the deferred dividends in arrears. Although our operations are much improved and they do not support the required growth in working capital and the payment of preferred dividends.
As a result and serve as a final reminder, we have scheduled this virtual special meeting of preferred stockholders for June 13. We approved an amendment that allows, would allow for the conversion of a share preferred stock into 3.9 shares of common stock.
However, in order to comply with the proxy rules, we will not make further comments regarding this beyond those contained press releases issued on May 8 and May 29. Additionally, we will not entertain any questions regarding this in the Q&A session.
As usual, I like to remind everyone that you should expect some fluctuations on our revenue from quarter-to- quarter as we saw this quarter. As we've seen many times in recent years, there will likely be quarterly revenue variation due to a variety of challenges and unforeseen circumstances or simple customer delivery requirements.
We continue to maintain our belief that the general trend we want to sustainably higher level revenue in fiscal 2025 and beyond. Looking forward, we're cautiously optimistic that barring any unexpected challenges or unforeseen circumstances, we should be able to deliver additional improvements to our results in the upcoming quarters.
Our current visibility, healthy customer engagement, strong backlog and favorable macro tailwinds give us confidence that we will see revenue growth, continued positive adjusted EBITDA in the coming quarters, which we anticipate culminating in another profitable year for Mind. We have differentiated and market-leading suite of products. We look forward to capitalize on customer demand to deliver increased shareholder value in the future periods.
And with that, operator, I think we can open the call up for some questions.

Question and Answer Session

Operator

(Operator Instructions) Tyson Bauer, KC Capital.

Tyson Bauer

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

Rob Capps

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

Tyson Bauer

Probably around variability. But overall, you're going to average higher quarterly levels.

Rob Capps

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

Tyson Bauer

So again, I don't think you're going to comment at all on EPS, given your previous. I just wanted to throw out for everybody. It's 8 million shares outstanding, if this boat goes through in. This quarter would have been $0.12, just simple.
Working capital relief, you have the increase in inventory and accounts receivable gives us a little flavor of that cash cycle trying to tighten that up because, you keep your accounts payable pretty tight and you have done so through the previous periods. Should we start to see some relief? Or are these going to be kind of those balances as we go forward? That we won't have a negative impact. We just will see levels kind of in the range that they were at the end of this quarter.

Rob Capps

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

Tyson Bauer

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

Rob Capps

Yeah, (inaudible) and you have some growth spurt, right? So that's right.

Tyson Bauer

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

Rob Capps

Yes. So some repeat customers, some new customers. So a little bit about socially as we kind of expand our streamer offerings that a 3D high-res received some new customers there. Order size, some bigger, some smaller. I mean, we see from a couple hundred thousand dollars to several million dollars. So it just depends Tyson as it's really all over the place.
I'd say, as far as orders in hand once we get a PO. Second, we're about a year typically as something that's out six months or more, it's not unusual at all, but we do have good visibility. I think on, as a potential thing sort of went out in that one-year period, not saying we have POs in hand, again, we have discussions going on. We know the customers have some plans, but they actually haven't placed the order yet.

Tyson Bauer

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

Rob Capps

Well, I don't want to give specifics for sure, but I think things are going as we anticipated. So I'm happy with where things are going right now.

Tyson Bauer

Okay. And last one for me before others get on. You have a significant amount of tax loss carry forwards that are US domiciled, that you're really not able to use depending on where the deliveries take place and you had a 20% tax rate this time. Are there avenues or have you been advised on how to try to monetize those loss carry forwards in the US to take advantage of those?

Rob Capps

Yeah so we are looking at things to do there. I'll tell you that monetizing is a difficult chore. Having tried to do that in the past. It's hard to do. The (inaudible) on purpose has limited your ability to do that. So we are trying to explore ways to be more a bit more tax efficient because, as you know, we are paying taxes in foreign jurisdictions right now.

Tyson Bauer

And most of your cash is held overseas? Correct?

Rob Capps

Well, it's generated overseas and it's sue there ordering back from time to time. So it's not going to US dollars.

Tyson Bauer

Okay. Thank you, gentlemen.

Operator

Ross Taylor, ARS Investment Partners.

Ross Taylor

Thank you. Can you walk through a couple of things? Maybe one is the cost structure which has come down, the SG&A structures come down some, but I would think it has more room to come down, given the shift in the business. Can you walk through the ability to bring that cost structure down?

Rob Capps

Yes. So I think you're right Ross, sorry, there is some ability to do more. Obviously, as we got rid of Klein, that's allowed us to build more lean at the corporate structure, at the corporate level. And I think there are some more things we can do there. We will still be more focused.
And I think there's still some benefits that haven't worked their way through the income statement yet and I think we'll see some continued improvement there. But we are a public company, even though we're small. So that creates some challenges. There's a point where you just can't go below some point.

Ross Taylor

What are your public company costs do you think? Would it be fair to assume you got a $1 million annual range?

Rob Capps

I'd say more than that.

Ross Taylor

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

Rob Capps

That's the math.

Ross Taylor

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

Rob Capps

Yes, that's complicated enough for those reasons you just mentioned. Look because, lead times have become an issue for many components for many things that we utilize. As items have rebounded historically had a 90-day lead time. We might see now 180 day lead time. So that means we have to be more aggressive in buying inventory and that's driven part of the increase that you're seeing.
So it's really hard to give you specifics at this point as to how quick we turn that. I think we are at a point where we don't anticipate having to increase that level beyond where we are now, again, unless we see a growth spurt. So we would expect to start to see that come down somewhat. That's a tough one to predict right now. And that's something we have to manage nearly on a daily basis, almost.

Ross Taylor

When you price new business, how do you protect yourself against those component, the cost of those components that might be chokepoints?

Rob Capps

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

Ross Taylor

Okay. So can you talk, you mentioned the fact that you have some native business really not adding a great deal at this stage. Can you talk about the market opportunity there and what your role or how you get compensated in that business? Is that a royalty has held up?

Rob Capps

So that's our [specialized] software suite, which front now is being marketed through general oceans [decline]. And so we have a license arrangement. So it's a recurring license fee, an annual license fee. So it builds on itself. So let's one where there's the software is developed, there are some maintenance of the software, but the costs are relatively minor in comparison.
So that's one where I think we have opportunity to build that. Is that going to be to $20 million a year business for us now. Could it to be a few million dollars. And that's a nice recurring business. And frankly, we think also we could take that same basic technology and apply it to other areas, other sensor systems and therefore expand that. But right now, we're trying to move slowly and get established, get a revenue stream coming and sale kind of pay for itself.

Ross Taylor

And what should we expect as that grows that it generates kind of traditional software margins?

Rob Capps

Yes, that's one reason, I like it so much, both from a margin standpoint and from a valuation standpoint, obviously.

Ross Taylor

Are you seeing any sectors meaningfully outperform your expectations here or meaningfully underperformed them? And if so, what do you think's driving the outer underperformance?

Rob Capps

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

Ross Taylor

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

Rob Capps

Appreciate that. Ross.

Operator

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

Rob Capps

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

Operator

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