MIND Technology Q3 2024 Earnings Call Transcript

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December 14, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Mine Technologies Third Quarter Fiscal 20 24 Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the call over to your host, Ken Dennard.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to the Mine Technologies Fiscal 20 24 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 housekeeping items to run through.

Speaker 1

If you'd like to listen to a replay of today's call, it will be available Via webcast by going to the Investor Relations section of the company's website at mine technology.com Or you can listen to a recorded instant replay until December 21. Information on how to access these replay features was provided in yesterday's earnings release. Information reported on this call speaks only as of today, Thursday, December 14, 2023 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 It 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.

Speaker 1

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 ks for the year ended January 31, 2023. Furthermore, as we start this call, Please also refer to the statement regarding forward looking statements incorporated in our press release issued yesterday. Please note that the contents of our conference call this morning are covered by these statements. With that now behind me, I'd like to turn the call over to Rob Capps. Rob?

Speaker 2

Thanks, Ken, and thank you all for joining us today. I'll start by addressing some key achievements during the quarter and highlights of our results. 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. First, I would address 2 very significant achievements for Mynd. During the quarter, we took a meaningful step towards streamlining and focusing our operations With the previously announced sale of Klein to General Oceans for cash consideration of $11,500,000 We utilized a portion of those proceeds to repay our term loan and eliminate our outstanding debt.

Speaker 2

This transaction, which resulted in a financial gain of almost $2,400,000 Has provided us with important liquidity and financial stability with which to exploit remarkable growth we're seeing within our Seamap business. Now this brings me to our second achievement. We ended the 3rd quarter with a record backlog of $37,400,000 Over double where it was just 3 months ago. I'll touch on this in greater detail shortly, but I believe this unprecedented backlog is indicative of our specialized Additionally, subsequent to the end of the quarter, we entered into a supply agreement with a major international seismic contractor. We expect to receive initial orders under this agreement shortly.

Speaker 2

This means that we start the Q4 of this fiscal year, move into next fiscal year With a record backlog and confidence in our continued order flow. Our Marine Technology Products revenue during the Q3 was $5,000,000 and this was significantly lower than we had anticipated. We experienced delays in the delivery of certain components, which prevented us from getting these orders completed, out the door and recognized as revenue before quarter end. These orders, which totaled from $5,000,000 to $6,000,000 are expected to be delivered in our fiscal Q4. This situation clearly demonstrates that supply chain issues, while much improved from a couple of years ago, are still with us and can impact results in particular periods.

Speaker 2

The good news here is that the orders are not lost, merely delayed. The magnitude of our backlog does give us better visibility and therefore better ability to manage our procurement process. However, Increased level of activity also means increased capital requirements. Based on the orders that were delayed And the schedule of other orders in our backlog, we expect a significant increase in revenues in our Q4. We continue to believe that Mynd is Exceptionally well positioned to capitalize on the favorable market dynamics to achieve sustainable top line improvement.

Speaker 2

We think our record backlog is indicative of the growing demand for our differentiated CMAP product lines, such as GunLink Source Controllers, GUI Link Positioning Systems and We believe this continued positive backlog trend and the early benefits of our framework agreement reflect the strength in the underlying market demonstrate that we are the partner of choice for companies looking to acquire high quality and versatile marine technology products. We continue to believe that the current market environment is advantageous for Mynd. Each of our 3 key markets, exploration, Having completed the sale of Clariant in August, we now operate a more streamlined and focused suite of products, And we are better positioned than ever to deploy our product lines into a variety of end markets. Additionally, our team continues to develop new and innovative ways to adapt and implement In addition to traditional energy related opportunities, We are seeing new applications for our CMAP technologies. As an example, our backlog includes over $5,000,000 related to one of our SeaLink Ultra High Resolution 3 d seismic streamer systems.

Speaker 2

This system is intended for use in surveys required for offshore wind farms and other green energy projects. There is also a growing opportunity for Mynd to provide seismic streamer repair services, not only for sealing streamers, but also for products manufactured by others. In the maritime defense and security market, we continue to believe that our Sea Serpent passive array system, which is derived from the commercially developed SeaLink system, is a significant and economical solution for various demanding applications within this space. We are also optimistic that Through our collaboration agreement with General Oceans, we will see increasing interest in our spectral AI software suite and find further applications for this technology. And with that, let me let Mark walk you through our Q3 financial results in a bit more detail.

Speaker 3

Thanks, Rob, and good morning, everyone. At the outset, I would like to point out that with the sale of Klein, those operations have been treated as discontinued operations 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 to decline. They include only our ongoing business. As Rob mentioned earlier, revenues from continuing marine technology product sales Totaled approximately $5,000,000 in the quarter, which was up about 64% from approximately $3,000,000 in the same period a year ago.

Speaker 3

While we experienced several delays during the Q3 that resulted in some revenue getting pushed into the 4th quarter, We believe the strength we are seeing in all our key markets and the growth in our backlog of orders positions us well for sustain higher level revenue in the coming quarters. Gross profit during the Q3 was approximately $2,300,000 which was up meaningfully when compared to gross profit of approximately $862,000 in the prior year period. This represents a gross profit margin of 45% for the quarter. We're pleased that we were able to deliver some Higher margin orders during the quarter despite the overall lower sequential revenue levels. Revenue in the quarter was largely driven by sales of spare parts as opposed to sales of full systems.

Speaker 3

These transactions, while smaller in size, Our general and administrative expenses were approximately $2,900,000 for the 3rd quarter, which was down slightly when compared to approximately $3,500,000 from the Q2 $3,000,000 for the same period a year ago. The sale of Klein is allowing us to streamline our operations and thereby reduce some costs. We've recently taken some actions in this regard, including selected headcount reductions, reducing the size of our Board of Directors and reducing the compensation for the remaining members of the Board. We also believe that the more streamlined operations will result in lower professional fees and travel costs. We will begin to see the impact of these changes in the Q4 of this year, but will not recognize the full benefit until next fiscal year.

Speaker 3

In the Q3, the impact of cost reduction measures taken earlier this year was partially offset by severance costs and higher professional fees. Our research and development expense for the Q3, which relates only to our continuing operations, was approximately $508,000 up slightly from the comparable period a year ago. These costs are largely directed toward the development of our next generation streamer system and continued development of our spectral AI software suite. Operating loss for the Q3 was approximately $1,500,000 which was nearly a 50% improvement from the loss of $2,900,000 in the Q3 of fiscal 2023. Our 3rd quarter adjusted EBITDA from continuing operations Was a loss of $1,100,000 compared to a loss of $2,400,000 in the Q3 last year.

Speaker 3

Overall, we reported net income of approximately $568,000 for the Q3 of this year, driven by a gain of approximately $2,400,000 on the sale of Klein. As of October 31, 2023, We had working capital of approximately $16,500,000 and approximately $5,600,000 of cash on hand. After factoring in net proceeds from the Klein sale completed in August, our liquidity position is significantly improved. Additionally, as a reminder, upon the closing of the sale of Klein, we repaid and eliminated our high cost debt, Leaving Mynd debt free today. I'll now pass it back over to Rob for some concluding comments.

Speaker 2

Okay. Thanks, Mark. Our conviction about the future of MIND technology has only been strengthened by our recent achievements. We've taken the necessary steps to streamline our operations and focus on profitability. We believe that this company is better positioned now than ever.

Speaker 2

Our marine technology products continue to penetrate a variety of industries and markets, which I believe is a direct correlation to the work that our team has done to develop and continually adapt We believe that the record backlog that we have achieved is just the beginning, There are still significant opportunities for our CMAP unit and our other initiatives. Market conditions remain favorable, And we generally feel that the robust customer interest and engagement that we've seen to date signifies that the market adoption of our product lines is gaining traction. We're confident the mine is headed in the right direction, and we look forward to building on the strong foundation that we've constructed. As I mentioned earlier, the increase in business comes up price, that being the capital needed to execute the growing business. As you probably know, we did declare and pay a dividend on first stock for the quarter ended October 31, 2023.

Speaker 2

However, there remains about $4,700,000 as accumulated dividends from prior periods and the ongoing dividends accrue at a rate of about $3,800,000 per year. While our liquidity and financial position are much improved, we do not believe that our current operations can generate the capital needed While no decisions have been made and circumstances can change, we currently believe it unlikely that we will declare further dividends on our preferred As 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 the general trend will be one of increased revenue. The favorable market trends, robust customer interest and substantial growth Our backlog continues to give us confidence that sustainable higher level revenue is achievable. Looking forward, We anticipate meaningful financial improvements in the Q4 and in fiscal 2025 as we convert our record backlog to revenue.

Speaker 2

We're encouraged By the current macro environment, we believe that our streamlined, differentiated and market leading suite of maritime technology products is uniquely positioned to Capitalize on favorable customer demand. We expect to continue adding new orders in the coming months and to utilize this momentum to drive meaningful shareholder value. And with that, operator, we can now open the call up for some questions.

Operator

Thank you. We will now be conducting a question and answer A confirmation tone will indicate your line is in the question Our first Question comes from the line of Tyson Bauer with Casey Capital. Please proceed with your question.

Speaker 4

Good morning, gentlemen.

Speaker 2

Hey, Tyson.

Speaker 4

Trying to get a where we are today kind of look at the company and all this is going to lead up to The eventual question of where we need to get to, but you ended the quarter at $37,400,000 of backlog, $5,000,000 to $6,000,000 of that is because we had deferred revenue that will fall into this quarter. So you have approximately $32,000,000 backlog that is a significant increase from $17,000,000 at the end of July. Where are you kind of today and where your backlog stands relative to also your recognized revenue in the quarter? Has that $5,000,000 to $6,000,000 been realized already along with your other expected Revenue you thought you're going to have or is this a situation where the components delay really has pushed everything to the right The calendar, so we don't necessarily have that catch up where all of a sudden we have a $12,000,000 $15,000,000 quarter.

Speaker 2

Yes. So Tyson, we those delayed orders have partially been shipped. They're not all completed, They've been partially done. We do expect them all done by the end of the quarter, much by the end of the calendar year. So I think we will see a bit of a catch up, to use your term, in this quarter.

Speaker 2

So it's not a valid way that's Getting pushed out all the way. There's a certain component that was 2 months late coming to us from a supplier. So So just didn't give us enough time to get everything built and out the door when we had originally scheduled to.

Speaker 4

And are these components that are just drop in or Like we see at the automakers, they need a chip. They build the vehicle and then they can put the chip in and then ship it. Is that the situation here where it's a drop in component that you can make the product And you're just waiting on that last component to complete it? Or is this something at the beginning of the process that just kind of halts the whole system installed?

Speaker 2

It's kind of halfway in between, that's the way I'd describe it. It certainly is a drop in, and we can complete much of the system, But we have to drop in this component before we can then complete everything else. So it's a little bit of both. So we certainly I've been able to continue with production and have things ready. We have components sitting on the bench right now that we're Again, dropping in to use your term to finish this and then of course then there's software to be burned in, things of that nature, part of the process that has to happen So we have been able to continue with the process.

Speaker 2

Thank you for the question.

Speaker 4

Okay. And just for the sake of clarity, because I think you mentioned this in the If the expectation you did $5,000,000 you thought you had $5,000,000 to $6,000,000 that was deferred that implies that you thought you were going to be able to do $10,000,000 to $11,000,000 in the quarter. I think in the last call, you thought that the quarters would be somewhat similar, obviously, depending on some timing issues. Does that mean you're walking into this quarter with the expectation that you thought you're going to do, say roughly 10,000,000 And the 5% to 6% is an add on or give us a little better clarity on

Speaker 2

that? No, I understand where you're going. And the answer is yes. Although, Understand just the caveat, things can happen and we can have something drop in unexpected, we do better, we get Something pushed to the left or to the right rather for whatever reason, but fundamentally your analysis is correct.

Speaker 4

Okay. When we look at where your accounts receivable were or was at the end of July compared to where it was, obviously, you have the benefit of Klein drops out of that obviously. Also, you didn't have the sales that were realized in the quarter. Does that anticipate if we go back to that July level And that level of business that you're expecting to do, since you haven't made all the deliveries as of yet, a $3,000,000 working capital requirement, Just on that alone, not looking at additional inventories in that, which would leave you at the end of the fiscal year, Roughly $2,500,000 of cash left.

Speaker 2

There's a lot of calculus that goes into that, Tyson. So I'm not sure I'd draw that Exact conclusion, certainly, the late shipments being delayed cash flow coming in, but there will be some catch up there as well. We have had to use working capital to buy components. So there's some benefit there. There are some contracts that we have Advanced payments on, prepayments from customers.

Speaker 2

So there's lots of things that go into that calculus. But I think the message is With the increase in business, that means there is an increase in work capital requirement, be it receivables, be it inventory. And so that's the reason we're trying to take the position we are.

Speaker 4

Okay. Well, that's why we're ultimately, all these questions are going to come down to what operational level do you think Or believe you need to be at to reinitiate that dividend, also meet your working capital needs given the growth outlook. And we've already seen, say, on your inventory, I think $2,000,000 increase that was offset by the reduction in accounts So at $5,500,000 where you ended the quarter, are you anticipating being able to maintain that level or is that level going to be further At the end of the year, at what level is comfortable for you to reexamine whether you have the operational results to reinitiate the dividend and meet your requirements for growth.

Speaker 2

So Tyson, the answer there is we don't know for sure Because we need to understand how the business is going to how the cash flow and how the working capital requirements are going to flow as this business flows through the production cycle. So that's the reason that we want to be conservative here and keep our powder dry, if you will. So that's the whole reason. This is a huge backlog improvement. I mean, this is unbelievably Larger than anything we've seen in the past.

Speaker 2

So we think it only prudent to make sure that we first serve the business and can

Speaker 4

And the foreseeable future. If we get through and we play a little catch up, as you just mentioned, and we start kind of getting in a more stabilized flow as long as component supply is there, Does that imply by the end of Q1 of the next fiscal year, you should be in a more comfortable position on where you're at To make that decision, I mean, is foreseeable future 1, 2 quarters? Or is it don't expect anything for the next fiscal year?

Speaker 2

I said, I don't know at this point. That's what we're trying to understand. So I can't give you more guidance than we have here.

Speaker 4

Okay. The pending contract structure, obviously, you're not going to name who and it probably doesn't make that big of a difference. Are those more for components, Whole systems that you are going to be supplying, which obviously is going to be far more lumpy and is that imply that they're operating As kind of a middleman as opposed to the end user, which is typically your customer?

Speaker 2

They refer full systems. They are the end user. And there is a production schedule that we're working out with them over the next several quarters.

Speaker 4

Okay. So when we see orders from them, these are going to be for whole systems. So we're looking at the 1.5000000 all the way up to 4000000 type systems that they would be purchasing at a time?

Speaker 2

Correct. And maybe even some smaller systems as well. But yes, the answer is yes.

Speaker 4

Okay. And is this a multi year agreement?

Speaker 2

It is.

Speaker 4

Is there an accordion type feature to this where you've set the price and it's just a function of that price will be good for what What they need going forward?

Speaker 2

No, no, no. But I don't want to get into specifics for some committed reasons as you might imagine.

Speaker 4

Okay. But we should see before the end of the year some more details and color come from this contract that will make it clear and obvious to the rest of us

Speaker 2

The scope of it? Yes. You should well. I think very confident about them.

Speaker 4

Okay. All right. I mean, for right now, I'm sure Ross is in queue. We'll let him take over. But It looks like at least operationally, you're where you want to be.

Speaker 4

It's just what are we going to do on a decision on that Accumulated deficit on the preferred and what is it going to take to actually catch up business wise To basically create that residual value for the common once we satisfy the preferred side. So, hopefully, we'll know that in a quarter or 2.

Speaker 2

Okay.

Operator

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

Speaker 5

Well, Tyson was right.

Speaker 2

Don't tell him that.

Speaker 5

Yes. Well, he knows it now. You and I have had a number of conversations about the imperative nature of paying this dividend There is no way you can I mean the equity is a residual here? And for those of us who own equity, We want and need you to get this preferred out of the way, so we can start to accumulate the value That is going to grow in this company. And it strikes me as a couple of questions first.

Speaker 5

What was the Inventory, working capital impact or drag last quarter from the deferred sales. Obviously, we're building stuff. You had costs that you incurred that didn't go out the door as sales to generate revenues. So what kind of impact was that?

Speaker 2

Our inventories over the last 6 months are up about $3,000,000 roughly.

Speaker 5

Okay. So as you sell that out, We should start to see that cash flow should come in.

Speaker 2

Yes. But understand, we're going to continue building Yes,

Speaker 5

I understand. Yes. As you build backlogs and accounts receiv, you and I talked about the fact that You can actually do other steps, factor accounts receivable, things of that nature that the cheapest debt you're really going to get Is the preferred, but it also absorbs right now that preferred probably has about $46,000,000 worth of value. Your equity has about $8,000,000 worth of value. It strikes me, as I said before, that if I want my equity to grow, You got to solve the problem with the preferred and it's got to be imperative.

Speaker 5

And one of the things that you guys do is you keep promising us it's going to work as a company. And then just when you get back on the road, it's like if you didn't think you could pay the 4th quarter dividend, why would you pay the 3rd? Save the money and pay it in the 4th, so So you can start a string of winning. I'm starting to think you guys are managed by the same people who manage the Seattle Mariners, Which is being from Seattle, not a compliment. But I think that I mean, I'm wrestling with what you're thinking is Because I'm hearing you say we worry about this, but in fact you have a lot of other alternatives to finance.

Speaker 5

You quite honestly, if I were sitting on your I would say if I vote against the dividend, the only other question is, I hire a banker for A, To shop the company or B, to give it to Tyson to do an ATM and raise $5,000,000 Because By my calculations for if you could buy back, let's say, 500,000 shares for $5,000,000 you actually create $3.33 a share in extra value for the common stock, which is Basically a better than 50% increase over what it went out at. It just strikes me as we really need to get focused on being a public company and developing The confidence of the street, as I said, every time it seems like you're about to turn that corner, you go into another dark place. How do we keep from being there? And answering Tyson's question of you don't know, I understand you don't know, but you got to have a plan and that plan's got to be Using these you and I talked about other ways of raising capital and using these other ways because I think that you want to actually be able to Eventually use that preferred dividend or preferred as a way to raise capital.

Speaker 5

It's a better way than going into the general financing market, I would think.

Speaker 2

Ross, I understand all your comments, believe me. And so nothing is news to me on this. So I understand completely.

Speaker 5

It's not news, but it's I mean, to be honest, and the idea that you dropped the comment, you haven't made a decision and you drop it with 2 weeks less than the year. It's just Rob, we've talked and I've known you for a long time and I've been a

Speaker 2

real loyal shareholder.

Speaker 5

But You know how frustrating it is to watch you basically come in and do something like this with 2 weeks left in the year Because it just sets it sets you back so much more than potential loss of 1 quarter's dividend. It sets you back to where you All the street cred you're building is going to have to be stopped. And I think your Board needs to recognize That's a you got cash and you got stuff coming on and your credibility as a public company. I mean, it's one thing if you're private, but you're public. So you have a duty to your shareholders.

Speaker 5

And I think that duty, I'd rather see you issue equity, dilute me a little bit on dilute me on equity even heavily So getting rid of that preferred, particularly if you can get rid of it at $10 or $12 a share, if you can buy back, that's a huge win for our shareholders. So we've got to be thinking about the game plan, okay? I know this isn't a happy conversation, but I'm not happy with the way this is solving together. So I feel like we're right back where we were a year or 2 ago except for we thought we were so much better. Okay.

Speaker 5

Thank you.

Speaker 2

All right. I appreciate the comments, Ross.

Speaker 5

And give Tyson a call about the ATM if you don't pay the dividend. I think he'd love the business.

Operator

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

Speaker 2

All right. Thanks everyone for joining us today. I look forward to talking to you at the end of our Q4. Thanks very much.

Operator

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

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Key Takeaways

  • Sale of Klein business for $11.5 million provided nearly $2.4 million gain, allowing repayment of the term loan and making the company debt-free.
  • The company ended Q3 with a record backlog of $37.4 million—over double the prior quarter—and entered a multi-year supply agreement expected to drive additional whole-system orders.
  • Marine Technology Products revenue of $5 million fell short of guidance due to supply chain delays affecting $5–6 million of orders, now deferred into fiscal Q4.
  • Q3 results showed a 45% gross profit margin ($2.3 million), a nearly 50% reduction in operating loss to $1.5 million, improved adjusted EBITDA loss of $1.1 million, and net income of $568,000.
  • Despite $5.6 million cash, $16.5 million working capital, and no debt, the record backlog increases capital needs and the board currently deems further preferred dividends unlikely.
AI Generated. May Contain Errors.
Earnings Conference Call
MIND Technology Q3 2024
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